I give small donations each year to charities that focus on children, the third world, military veterans, and education. One is Doctors Without Borders. They sent this video.
Friday, January 10, 2014
Tuesday, January 7, 2014
More College Does Not Beget More Economic Prosperity
In a recent Forbes column George Leef of the John William Pope Center for Higher Education Policy points out that, contrary to President Obama's claim, higher education does not improve economic performance. The claim that it does improve the economy arises from an error: the belief that correlation implies causation. Countries with more wealth have more college graduates because they can afford to send more students to college. They are not more wealthy because they have more graduates, for college attendance is a consumption good. My guess is that the number of automobiles per capita contributes more to national wealth than do college degrees.
The claim that education leads to wealth is based on human capital theory. Human capital theory goes back to Adam Smith''s 1776 Wealth of Nations and Alfred Marshall's 1890 Principles of Economics. The economist most closely associated with the human capital theory is Gary Becker, who won the Nobel Prize in economics.
Labor economists contrast the human capital theory with Michael Spence's signaling theory, to which Leef alludes in his article. Spence also won a Nobel Prize in economics. Signaling theory suggests that ability is correlated with education, so years of education signal underlying ability. A difference between human capital theory and signaling theory is that the former suggests that the material learned in school is relevant to economic performance while signaling theory does not. Completion of a course in abstract mathematics suggests a high level of underlying ability even if the graduate ends up working in an unrelated field. If signaling theory is right, then a simple IQ test and completion of a US Marines or Navy Seals boot camp training will predict as much as a college degree, maybe more.
I prefer a third alternative: institutionalist theory. Institutionalist thinking places weight on mimesis in the creation of cultural patterns that are often irrational. College is popular because of imitation. In his 1978 book Culture of Professionalism, Burton Bledenstein shows that the impulse toward professionalism was a crucial foundation of the Progressive movement and that Americans have had a preference for professional status over and above wealth, fame, and learning. Education is a sign of professionalism, so it is desired as a consumer good. Likewise, American firms have preferred college graduates because degrees imbue their managements with professional status. There is no evidence that higher education has contributed to firms' economic success. To the contrary, the rise in the number of college graduates in America after World War II paralleled the ascendance of Japanese industry and the decline of Detroit.
In his important work on productivity differences around the world, William Lewis of the McKinsey consulting firm showed, in the early 1990s, that production workers in the third world could be made to be about as productive as American workers through improvement in the organization of work and workplace training. Third world workers can produce economic results that equal those of high school and college graduates. Producing them requires insight as to the organization of work. This was achieved in postwar Japan through innovative thinking at Toyota. More generally, the individuals most responsible for workplace innovation have been Frederick Winslow Taylor, who chose not to attend college, Henry Ford, who did not go to college, W Edwards Deming, who held a Ph.D. in physics but never got a job related to his degree, and Taiichi Ohno, the inventor of lean manufacturing and the Toyota production system. Ohno held a degree from Nagoya Technical High School. An exception is Sam Walton, who held a BA from the University of Missouri.
The chief contributions of business schools to business practice have been through the human relations movement, job redesign, the marketing concept, the capital asset pricing model, and other financial theories. These are minor contributions. The human relations school, for example, has contributed to Japanese management practice, but it has been ignored in the US as the Marxist critic (and Brooklyn College dropout) Harry Braverman points out in his Labor and Monopoly Capital. The finance field, which is the one to which academics have made the most contributions, has been a canker sore on the American economy, requiring a multitrillion dollar bailout and ongoing subsidization from the Federal Reserve Bank; it has produced little of value in return. Without college education Henry Ford invented the assembly line; Taiichi Ohno reinvented it.
In After Virtue, a classic work on ethics, Alisdair MacIntyre claims that there are three fraudulent figures of the modern world: the aesthete, the psychiatrist, and the manager. There is a fourth: the business professor who claims to raise productivity but knows nothing about the substance of management. I am not the first to make this claim: Abraham Zaleznik, in his Managerial Mystique, argues that business schools have lost touch with the substance of business. As a critique of business education, Zaleznik's point is right, but its implications go further. If business schools do not teach students how to succeed in business, why do they exist?
During America's period of most innovative and rapid economic growth, from 1840 to 1920, only about five percent of Americans attended college. There is no evidence that much of the innovation of that period, chronicled in David Ames Wells's 1889 Recent Economic Changes, came from people with college degrees. During that period college degrees were associated with professional careers, notably law, although doctors and lawyers often lacked undergraduate degrees. College was mostly associated with careers in the clergy until the 20th century. It wasn't until well into the Progressive era that the claim that college education had anything to do with business success gained traction. By then, most of the innovation associated with the modern world had occurred; even television and radio had been invented, by Nikola Tesla, in the 19th century. Tesla, incidentally, had thought of AC electricity before attending a technological college in Europe, and his professor discouraged his pursuit of the AC motor, which created the modern world.
Barack Obama has done much harm to the nation through his ill-conceived health reform and common core. His claims about higher education, as Leef points out, will contribute to American economic decline.
The claim that education leads to wealth is based on human capital theory. Human capital theory goes back to Adam Smith''s 1776 Wealth of Nations and Alfred Marshall's 1890 Principles of Economics. The economist most closely associated with the human capital theory is Gary Becker, who won the Nobel Prize in economics.
Labor economists contrast the human capital theory with Michael Spence's signaling theory, to which Leef alludes in his article. Spence also won a Nobel Prize in economics. Signaling theory suggests that ability is correlated with education, so years of education signal underlying ability. A difference between human capital theory and signaling theory is that the former suggests that the material learned in school is relevant to economic performance while signaling theory does not. Completion of a course in abstract mathematics suggests a high level of underlying ability even if the graduate ends up working in an unrelated field. If signaling theory is right, then a simple IQ test and completion of a US Marines or Navy Seals boot camp training will predict as much as a college degree, maybe more.
I prefer a third alternative: institutionalist theory. Institutionalist thinking places weight on mimesis in the creation of cultural patterns that are often irrational. College is popular because of imitation. In his 1978 book Culture of Professionalism, Burton Bledenstein shows that the impulse toward professionalism was a crucial foundation of the Progressive movement and that Americans have had a preference for professional status over and above wealth, fame, and learning. Education is a sign of professionalism, so it is desired as a consumer good. Likewise, American firms have preferred college graduates because degrees imbue their managements with professional status. There is no evidence that higher education has contributed to firms' economic success. To the contrary, the rise in the number of college graduates in America after World War II paralleled the ascendance of Japanese industry and the decline of Detroit.
In his important work on productivity differences around the world, William Lewis of the McKinsey consulting firm showed, in the early 1990s, that production workers in the third world could be made to be about as productive as American workers through improvement in the organization of work and workplace training. Third world workers can produce economic results that equal those of high school and college graduates. Producing them requires insight as to the organization of work. This was achieved in postwar Japan through innovative thinking at Toyota. More generally, the individuals most responsible for workplace innovation have been Frederick Winslow Taylor, who chose not to attend college, Henry Ford, who did not go to college, W Edwards Deming, who held a Ph.D. in physics but never got a job related to his degree, and Taiichi Ohno, the inventor of lean manufacturing and the Toyota production system. Ohno held a degree from Nagoya Technical High School. An exception is Sam Walton, who held a BA from the University of Missouri.
The chief contributions of business schools to business practice have been through the human relations movement, job redesign, the marketing concept, the capital asset pricing model, and other financial theories. These are minor contributions. The human relations school, for example, has contributed to Japanese management practice, but it has been ignored in the US as the Marxist critic (and Brooklyn College dropout) Harry Braverman points out in his Labor and Monopoly Capital. The finance field, which is the one to which academics have made the most contributions, has been a canker sore on the American economy, requiring a multitrillion dollar bailout and ongoing subsidization from the Federal Reserve Bank; it has produced little of value in return. Without college education Henry Ford invented the assembly line; Taiichi Ohno reinvented it.
In After Virtue, a classic work on ethics, Alisdair MacIntyre claims that there are three fraudulent figures of the modern world: the aesthete, the psychiatrist, and the manager. There is a fourth: the business professor who claims to raise productivity but knows nothing about the substance of management. I am not the first to make this claim: Abraham Zaleznik, in his Managerial Mystique, argues that business schools have lost touch with the substance of business. As a critique of business education, Zaleznik's point is right, but its implications go further. If business schools do not teach students how to succeed in business, why do they exist?
During America's period of most innovative and rapid economic growth, from 1840 to 1920, only about five percent of Americans attended college. There is no evidence that much of the innovation of that period, chronicled in David Ames Wells's 1889 Recent Economic Changes, came from people with college degrees. During that period college degrees were associated with professional careers, notably law, although doctors and lawyers often lacked undergraduate degrees. College was mostly associated with careers in the clergy until the 20th century. It wasn't until well into the Progressive era that the claim that college education had anything to do with business success gained traction. By then, most of the innovation associated with the modern world had occurred; even television and radio had been invented, by Nikola Tesla, in the 19th century. Tesla, incidentally, had thought of AC electricity before attending a technological college in Europe, and his professor discouraged his pursuit of the AC motor, which created the modern world.
Barack Obama has done much harm to the nation through his ill-conceived health reform and common core. His claims about higher education, as Leef points out, will contribute to American economic decline.
Monday, December 30, 2013
No One Wants to Teach Writing
My piece "No One Wants to Teach Writing" appears in the John William Pope Center for Higher Education Policy website commentaries section.
Wednesday, December 25, 2013
Investing in '14: Coping with 100 Years of Fed Blundering
On the 100th anniversary of the founding of the Federal Reserve Bank, the coming year's investment climate is complicated by the residue of historical interest rate policy. The low interest rates that have been favored from Nixon through Obama subsidize asset holders, business interests, and the wealthy, and they penalize savers, pensioners, and workers. The Obama bailout of 2008-10 has pushed real interest rates to historically low levels; such levels are unlikely in market-based economic systems. They have resulted in misallocation of wealth, increased income inequality, excessive risk seeking by the elderly, bullishness in the stock market, and volatility in the gold market.
Gold
I pulled out of gold in April 2013 because the gold market was reacting to the tripling of the nation's money supply much as it reacted to the monetary expansion of the Volcker-and-Greenspan Fed. As the Fed pushed down interest rates in both periods (1983-2000 and 2008-2010) gold production expanded. In both periods production also expanded in response to rising gold prices. Paradoxically, though, increased commodity exploration and production cause lower prices. Declines in the gold price occurred in 1983-2000 and 2012 even though both were periods of monetary expansion. The 2008-2011 period was still riding the prior cycle, but the monetary expansion of 2008-2013 has been so large as to create an entirely new cycle in a short period of time.
As gold producers collapse during the current period, the scene is set for a new increase in commodity prices. Nevertheless, the gold market has yet to capitulate. That might occur in 2014. I currently have a small short position in gold and am otherwise out of gold and silver. I am hoping for a sharp downturn in gold prices sometime in 2014.
MLPs
The recent past has seen advances in energy technology, notably hydraulic fracturing or fracking. That has led to a sharp decline in natural gas prices for the past few years (see chart, courtesy of Google):
As fracking proceeds, the price can fall even further, leading to the potential for exports of energy from America. Hence, natural gas infrastructure investments through Master Limited Partnerships (MLPs) have an intriguing outlook, except for the matter of interest rates. MLPs, the vehicles by which investors invest in natural gas pipelines, tankers, and depots, are leveraged. That creates interest-rate risk. However, the good-quality MLPs have pricing flexibility and earn significantly more than their interest cost. As a result,the long-term risk is limited. When the stock market tanks, so will the MLPs, though.
I listened to a conference call for Legg Mason's Clearbridge American MLP Fund. The price had fallen sharply, ostensibly in reaction to concern about rising interest rates in response to the Fed's tapering of its monetary expansion program. The fund's representatives made a convincing case that the underlying MLPs have good coverage ratios and that they have flexibility to increase payouts in case interest rates rise. The fund's managers claimed that part of the recent declines have been due to end-of-year, tax-loss selling. Within a few days after the conference call the price has risen several percent.I am eager to see the fund's performance in January. If it continues to rise, then the representatives' point is proven.
For now, I am still positive about MLPs. I am also positive about tech stocks and health care stocks, at least for the beginning of 2014. I am also bullish about real estate into 2014. The information about interest rates is already built into the stock market, and the monetary expansion that has already occurred contributes to bullishness. Of course, the bailout and quantitative easing will result in unhappy monetary results, but who cares if the average American goes hungry? The stock market is going up!
Hedging Rising Real Interest Rates
At the same time, low real interest rates give me pause about stocks, MLPs, and real estate because rates are going to rise, which causes declines in financial markets. Princeton economist, Nobel prize winner, and former ethics consultant to Enron, Paul Krugman, did a quick-and-dirty pictorial estimate of historical real interest rates in his column in The Times:
Notice a few things: First, there was a slight increase in real rate volatility following Nixon's election in 1968. Second, when the international gold standard was eliminated in 1971, the volatility in real interest rates heated up. Nixon was manipulating rates by influencing Columbia economist and Fed chief Arthur Burns. Third, there was a sharp downturn in rates in response to Nixon's reelection bid. Fourth, there was a sharp upturn as the Fed under Paul Volcker raised rates (tightened the money supply) to squeeze out inflation. That resulted in an economic downturn, but by 1983 Volcker reopened the monetary spigot, initiating a 30-year decline in real rates, the modestly high inflation rate of 1983-2008 (see chart), the impetus for military aggression in the Middle East in the millennial period, the rising stock market of the 1983-2000 period, the millennial bubbles, and current economic volatility.
Real rates are at historically low levels. According to the chart, there was a brief period in the early-to-mid 1970s when Nixon and Burns pushed them lower, but by the late 1970s inflation was in the teens. It is the monetary expansion rather than the interest rate that potentially causes inflation. An uptick in inflation will motivate the Fed to raise interest rates. That will probably harm the MLPs I mention above as well as bonds, fixed income securities, and likely the stock and real estate markets. In other words, there is a narrow course of tapering that the Fed has outlined, but if there is an uptick in inflation, then there can be a spike in rates. That will be unpleasant for people holding financial assets.
There is reason to be concerned about the financial markets as 2014 winds down and 2015 begins. In a 2010 blog, the colorful Larry McDonald, author of A Colossal Failure of Common Sense, blogged about how to bet on rising rates.
McDonald suggests these funds, which are mostly at all-time lows:
RRPIX Profunds Rising Rates Opportunity Fund
RTPIX Profunds Rising Rates Opportunity Fund 10 Investor
RYJUX Rydex Inverse Government Long Bond Stratgegy
TBT Ultrashort 20+ Year Treasury Proshares
Ultrashort 7-10 Year Treasury Proshares PST
Horizon BetaPro 30 year Bond Bear HTD (on the TSX, not HTD on the American exchanges)
It seems to me that a partial hedge with one or two of these funds is a good idea at this point or in the near future.
Gold
I pulled out of gold in April 2013 because the gold market was reacting to the tripling of the nation's money supply much as it reacted to the monetary expansion of the Volcker-and-Greenspan Fed. As the Fed pushed down interest rates in both periods (1983-2000 and 2008-2010) gold production expanded. In both periods production also expanded in response to rising gold prices. Paradoxically, though, increased commodity exploration and production cause lower prices. Declines in the gold price occurred in 1983-2000 and 2012 even though both were periods of monetary expansion. The 2008-2011 period was still riding the prior cycle, but the monetary expansion of 2008-2013 has been so large as to create an entirely new cycle in a short period of time.
As gold producers collapse during the current period, the scene is set for a new increase in commodity prices. Nevertheless, the gold market has yet to capitulate. That might occur in 2014. I currently have a small short position in gold and am otherwise out of gold and silver. I am hoping for a sharp downturn in gold prices sometime in 2014.
MLPs
The recent past has seen advances in energy technology, notably hydraulic fracturing or fracking. That has led to a sharp decline in natural gas prices for the past few years (see chart, courtesy of Google):
 | |||
| 15 Years Later Natural Gas Prices at 1999 Level |
I listened to a conference call for Legg Mason's Clearbridge American MLP Fund. The price had fallen sharply, ostensibly in reaction to concern about rising interest rates in response to the Fed's tapering of its monetary expansion program. The fund's representatives made a convincing case that the underlying MLPs have good coverage ratios and that they have flexibility to increase payouts in case interest rates rise. The fund's managers claimed that part of the recent declines have been due to end-of-year, tax-loss selling. Within a few days after the conference call the price has risen several percent.I am eager to see the fund's performance in January. If it continues to rise, then the representatives' point is proven.
For now, I am still positive about MLPs. I am also positive about tech stocks and health care stocks, at least for the beginning of 2014. I am also bullish about real estate into 2014. The information about interest rates is already built into the stock market, and the monetary expansion that has already occurred contributes to bullishness. Of course, the bailout and quantitative easing will result in unhappy monetary results, but who cares if the average American goes hungry? The stock market is going up!
Hedging Rising Real Interest Rates
At the same time, low real interest rates give me pause about stocks, MLPs, and real estate because rates are going to rise, which causes declines in financial markets. Princeton economist, Nobel prize winner, and former ethics consultant to Enron, Paul Krugman, did a quick-and-dirty pictorial estimate of historical real interest rates in his column in The Times:
 | |||||||
| Enron Consultant Paul Krugman's Quick Estimate of Real Interest Rates |
Real rates are at historically low levels. According to the chart, there was a brief period in the early-to-mid 1970s when Nixon and Burns pushed them lower, but by the late 1970s inflation was in the teens. It is the monetary expansion rather than the interest rate that potentially causes inflation. An uptick in inflation will motivate the Fed to raise interest rates. That will probably harm the MLPs I mention above as well as bonds, fixed income securities, and likely the stock and real estate markets. In other words, there is a narrow course of tapering that the Fed has outlined, but if there is an uptick in inflation, then there can be a spike in rates. That will be unpleasant for people holding financial assets.
There is reason to be concerned about the financial markets as 2014 winds down and 2015 begins. In a 2010 blog, the colorful Larry McDonald, author of A Colossal Failure of Common Sense, blogged about how to bet on rising rates.
McDonald suggests these funds, which are mostly at all-time lows:
RRPIX Profunds Rising Rates Opportunity Fund
RTPIX Profunds Rising Rates Opportunity Fund 10 Investor
RYJUX Rydex Inverse Government Long Bond Stratgegy
TBT Ultrashort 20+ Year Treasury Proshares
Ultrashort 7-10 Year Treasury Proshares PST
Horizon BetaPro 30 year Bond Bear HTD (on the TSX, not HTD on the American exchanges)
It seems to me that a partial hedge with one or two of these funds is a good idea at this point or in the near future.
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