Weekend reading links

1. I had blogged briefly earlier about the challenges associated with compliance with standards in Indian Railways. This is a much under-appreciated problem with most things done by governments - delivering in an environment of acute scarcity of resources, time, and capacity.

Alok Kumar Verma, a retired Railway officer, shines light on the problem and argues at how safety and speed have been crowded out by priorities of capital intensive modernisation and new trophy projects. The article deserves to be quoted at length,

The recent accident near Khatauli station on August 19, which resulted in the death of 23 passengers, is a reminder of the dangers of the excessive over-utilisation of the lines. The section where the accident occurred carries 35 trains a day against a capacity of 25 trains. Reportedly, block (temporary suspension of traffic) for carrying out repairs to a broken rail was refused... According to the latest data, utilisation exceeds the capacity on 65 per cent of busy routes. It is 120 per cent to 150 per cent on 32 per cent of the routes, and utilisation exceeds 150 per cent on 9 per cent of the routes. For optimal performance, utilisation should be 80 to 90 per cent of the capacity. Over-utilisation is leaving little time for safety inspections and essential maintenance of track and other infrastructure as well as the rolling stock. The focus of IR has shifted to daily fire-fighting, to somehow keep trains running, leading to all sorts of maladies like inter-departmental tussles and low morale. Arguably, IR has one of the highest incidences of accidents due to material, equipment and human failures.

From 1985-2000, IR acquired locomotives, coaches and wagons and carried out modernisation and upgradation of track and other infrastructure, with massive infusion of funds. But it kept deferring the last mile works (which include the easing of sharp curves, strengthening some bridges, improving track geometry to tighter tolerances, cab signalling etc.) that are needed to unlock the full potential of an upgraded network. The last mile works are tough to execute, requiring immaculate planning and precise execution. Blocks will be regularly needed for which some services may have to be diverted or curtailed temporarily. Services that can be catered to by road transport, like short distance passenger trains, shall have to be closed altogether.

A comparison with the Chinese Railway (CR) is illustrative of the magnitude of IR’s failure. Till the 1990s, the speed of trains on CR was limited to 100 to 120 km/hr. But in the 10 years (1997-2007), it undertook a “speed-up” campaign in six rounds and raised speeds to 160 km/hr on 14,000 km and to 200 km/hr on 5,370 km route-lengths. Simultaneously, the speed of freight trains was raised to 100 to 120 km/hr. With the streamlining traffic flow, line capacity was increased by 60 to 70 per cent... Indian Railways has remained stuck at 130 km/hr since 1969, while congestion on the trunk routes sky-rocketed. It’s time to shift focus to the core network that carries more than 80 per cent of the total traffic. The last mile works for upgrading the trunk routes which were repeatedly deferred should be undertaken on a priority basis so that the entire nation can realise the benefits of faster and safer travel. Else, safety on Indian Railway will only worsen.

This is a classic problem in governments. Addressing last mile gaps is unsexy and does not bring laurels. Maintenance of existing assets is invariably overlooked for new projects, where ribbons can be cut, inauguration done, and personal credits apportioned. It is the same everywhere - power transmission and distribution, water and sewerage, and all existing infrastructure elsewhere.

Let's face it. This is a big choice that Railway Ministry, led by the Government of India, has to make. Identify two or three objectives - safety, raising speeds, increasing freight - and single-mindedly pursue them for a decade or so. In doing so, the leadership will have to acknowledge the costly and often politically difficult trade-offs that are necessary.

2. Ananth points to an excellent article by Chris Balding that highlights the wave of academic censorship sweeping China and how western universities are helping its spread. He points to the decision by Cambridge University Press to take down 300 articles from its Chinese website at the request of Chinese government and writes about the choice facing Western academia and how they have chosen to respond,

It was the fact that a respected publication was bending the knee to censorship and what this represented about the broader complicity of Western organizations, universities, and academics in helping China export its academic censorship around the world... Western universities’ traditional response to criticisms on China’s restrictions on free inquiry was to claim that they could help liberalize their Chinese counterparts by establishing contact with them. What has happened instead is that they’ve ended up importing Chinese academic censorship into their own institutions. Cambridge University Press censoring on behalf of Beijing is not the first time elite British universities have opted for the bottom line over principle in accepting Chinese censorship contributions... Aiming for a diverse student body or announcing opposition to U.S. President Donald Trump’s immigration ban is a low-cost form of opposition that helps a university establish liberal credentials at home. No foreign university, however, has demonstrated willingness to show the same level of opposition to demands made by the Chinese government that it would deem unacceptable at home. The opportunities are too big, and their principles turn out to be surprisingly pliable. Western universities, academics, and publishing houses face a stark choice. If they continue to obey Beijing, they make themselves complicit in promoting censorship and human rights violations. If they walk away, they turn their backs on large revenue streams and potential donors.

I had blogged earlier here and here about the larger point that Ananth makes about the hypocrisy of the western liberals who on the one side criticise Trump (and rightly so) and cry hoarse on issues that involve no trade-offs but pliantly ignore those that inflict costs. It is one thing to demonise Russia and aggressively pursue the low-cost option of forcing the tightening of sanctions on that country. It is an altogether different thing to incur personal costs and go beyond mere bleeding heart articles and force actions on things like executive compensation or business concentration and anti-trust action. 

New America Foundation, a left leaning think tank, of which Google and Eric Schmidt are major donors was at the centre of a recent controversy. It removed Eric Lynn, a scholar who had posted an article praising the European regulator's decision to levy a $2.7 bn fine on Google on anti-trust actions, reportedly at Eric Schmidt's behest. Annie Marie Slaughter, a darling of the liberal elites for her no trade-off and "talk is cheap" views on several social issues, summoned Lynn and fired him for "imperilling the institution as a whole". 

Both the protagonists, Eric Schmidt and Annie Marie Slaughter, are important, reputed, and credible voices of the liberal establishment, and their hypocrisy when faced with personal costs is what creates events like Brexit and Trump. 

3. Business concentration and the rising power of monopolies has been a constant theme of this blog in recent times. Noah Smith has a very good article that summarizes the literature,

In the past few years, researchers have found that industrial concentration -- measured by the market share of the four biggest companies in an industry -- has indeed been increasing in most parts of the U.S. economy. They’ve documented a correlation between industrial concentration and a decline in labor’s share of national income. They’ve confirmed that profits have risen substantially. They’ve documented a slackening in the enforcement of antitrust law. And they’ve found some evidence that after mergers, prices go up while productivity doesn’t improve. A paper by economists Jan de Loecker and Jan Eeckhout, has caused quite a stir... find that markups -- the amount that companies charge over and above their costs -- have been on the rise since about 1980. Back then, according to the authors’ estimates, the average company charged a price that was about 18 percent above costs -- now, the number is 67 percent...

A second paper, by German Gutierrez and Thomas Philippon... look at historical episodes where competition increased -- an unusual wave of new companies in the 1990s, and increased Chinese competition in the 2000s. In each situation, industries where competition increased more also tended to invest more... Gutierrez and Philippon have another paper where they test eight different economic theories to explain falling business investment, and find that market power -- along with corporate short-termism -- is the most likely explanation. Another paper, by Gustavo Grullon, Yelena Larkin and Roni Michaely... find that in industries that have become more concentrated, profits have risen. And they verify that concentration has been caused by megamergers among public companies, not by some companies going private and disappearing from the records. A final paper, by economists Mihir Mehta, Suraj Srinivasan and Wanli Zhao, finds evidence of political influence driving antitrust enforcement. Mehta et al. discover that when a company trying to do a merger happens to be headquartered in the district or the state of a politician who oversees antitrust enforcement, the merger is more likely to be approved. 

4. The gains for the Indian economy from lower oil and commodity prices have been very significant.  Sample this

The decline in crude prices has led to a significant reduction in import bill from Rs 8.6 lakh crore in FY14 to Rs 4.7 lakh crore in FY17, resulting in savings of approximately Rs 8-10 lakh crore... Since crude bill is paid in dollars, this has led to a saving of foreign exchange of $150 odd billion in the last three years. The bulk of the increase in forex reserves from May 2014 to current date is on account of the above. The decline in crude prices has had a significant impact on inflation. This has resulted in an increase in disposable income of Indians by 3.3 percent of GDP as per an IMF report, which in turn has provided a boost to private consumption...

While crude oil price, inclusive of adverse exchange rate movement, has declined by 49 percent, petrol prices have reduced only by 8.5 percent... All this has led to a significant decline in petroleum subsidy bill from Rs 65,000 crore in FY14 to Rs 27,000 crore in FY17... On an aggregate, Rs 11-13 lakh crore have been savings/additional receipts to the Modi government on account of low crude oil prices. This accounts for around 3 percent of aggregate GDP of FY15-17. The higher excise duty receipts have helped GoI maintain its fiscal deficit targets.

These are very significant numbers. Without this good fortune, we may well have been staring down the abyss. 

5. Ta-Nehisi Coates takes issue with the Trump-as-a-white working class reaction and frames it as Trump-as-a-white America reaction (not just to a just concluded black American presidency but a deep-rooted white supremacist belief). Sample this,

According to Edison Research, Trump won whites making less than $50,000 by 20 points, whites making $50,000 to $99,999 by 28 points, and whites making $100,000 or more by 14 points. This shows that Trump assembled a broad white coalition that ran the gamut from Joe the Dishwasher to Joe the Plumber to Joe the Banker. So when white pundits cast the elevation of Trump as the handiwork of an inscrutable white working class, they are being too modest, declining to claim credit for their own economic class. Trump’s dominance among whites across class lines is of a piece with his larger dominance across nearly every white demographic. Trump won white women (+9) and white men (+31). He won white people with college degrees (+3) and white people without them (+37). He won whites ages 18–29 (+4), 30–44 (+17), 45–64 (+28), and 65 and older (+19). Trump won whites in midwestern Illinois (+11), whites in mid-Atlantic New Jersey (+12), and whites in the Sun Belt’s New Mexico (+5). In no state that Edison polled did Trump’s white support dip below 40 percent. Hillary Clinton’s did, in states as disparate as Florida, Utah, Indiana, and Kentucky. From the beer track to the wine track, from soccer moms to nascar dads, Trump’s performance among whites was dominant. According to Mother Jones, based on preelection polling data, if you tallied the popular vote of only white America to derive 2016 electoral votes, Trump would have defeated Clinton 389 to 81, with the remaining 68 votes either a toss-up or unknown...

The focus on one subsector of Trump voters—the white working class—is puzzling, given the breadth of his white coalition. Indeed, there is a kind of theater at work in which Trump’s presidency is pawned off as a product of the white working class as opposed to a product of an entire whiteness that includes the very authors doing the pawning. The motive is clear: escapism. To accept that the bloody heirloom remains potent even now, some five decades after Martin Luther King Jr. was gunned down on a Memphis balcony—even after a black president; indeed, strengthened by the fact of that black president—is to accept that racism remains, as it has since 1776, at the heart of this country’s political life. The idea of acceptance frustrates the left. The left would much rather have a discussion about class struggles, which might entice the white working masses, instead of about the racist struggles that those same masses have historically been the agents and beneficiaries of. Moreover, to accept that whiteness brought us Donald Trump is to accept whiteness as an existential danger to the country and the world. But if the broad and remarkable white support for Donald Trump can be reduced to the righteous anger of a noble class of smallville firefighters and evangelicals, mocked by Brooklyn hipsters and womanist professors into voting against their interests, then the threat of racism and whiteness, the threat of the heirloom, can be dismissed. Consciences can be eased; no deeper existential reckoning is required... 

the argument that America’s original sin was not deep-seated white supremacy but rather the exploitation of white labor by white capitalists—“white slavery”—proved durable. Indeed, the panic of white slavery lives on in our politics today. Black workers suffer because it was and is our lot. But when white workers suffer, something in nature has gone awry. And so an opioid epidemic among mostly white people is greeted with calls for compassion and treatment, as all epidemics should be, while a crack epidemic among mostly black people is greeted with scorn and mandatory minimums. Sympathetic op‑ed columns and articles are devoted to the plight of working-class whites when their life expectancy plummets to levels that, for blacks, society has simply accepted as normal. White slavery is sin. Nigger slavery is natural.

This is the central point that Coates is making,

An imagined white working class remains central to our politics and to our cultural understanding of those politics, not simply when it comes to addressing broad economic issues but also when it comes to addressing racism. At its most sympathetic, this belief holds that most Americans—regardless of race—are exploited by an unfettered capitalist economy. The key, then, is to address those broader patterns that afflict the masses of all races; the people who suffer from those patterns more than others (blacks, for instance) will benefit disproportionately from that which benefits everyone. “These days, what ails working-class and middle-class blacks and Latinos is not fundamentally different from what ails their white counterparts,” Senator Barack Obama wrote in 2006...

Obama allowed that “blacks in particular have been vulnerable to these trends”—but less because of racism than for reasons of geography and job-sector distribution. This notion—raceless antiracism—marks the modern left, from the New Democrat Bill Clinton to the socialist Bernie Sanders. Few national liberal politicians have shown any recognition that there is something systemic and particular in the relationship between black people and their country that might require specific policy solutions... Certainly not every Trump voter is a white supremacist, just as not every white person in the Jim Crow South was a white supremacist. But every Trump voter felt it acceptable to hand the fate of the country over to one... White workers are not divided by the fact of labor from other white demographics; they are divided from all other laborers by the fact of their whiteness.

It is indeed surprising that this very plausible narrative foresee has hardly found its way into the mainstream.

6. Finally, from MR, this letter reveals the very fine mind that James Buchanan had, 

Given the state monopoly as it exists, I surely support the introduction of vouchers. And I do support the state financing of vouchers from general tax revenues. However, although I know the evils of state monopoly, I would want somehow, to avoid the evils of race-class-cultural segregation that an unregulated voucher scheme may introduce... We should not want a voucher scheme to reintroduce the elite that qualified for membership only because they have taken Greek and Latin classics. Ideally, and in principle, it should be possible to secure the beneficial effects of competition, in providing education, via voucher support, and at the same time to secure the potential benefits of commonly shared experiences, including exposure to other races, classes, and cultures. In practice we may not be able to accomplish the latter at all.

I had blogged earlier about Ken Arrow's cautious case for socialism. Genius is not about figuring out complicated models or crunching numbers to tease out social trends, but is about connecting research to fundamental, but glossed over, nuances of real life. There are very few such minds today.

Markets in education - Growing too large and too fast is hard

The publicly financed but independently run Charter Schools are often thought as the solution to addressing quality in school education in the US. It was, therefore, with great expectations that Michigan embraced Charter Schools a few years back in an effort to improve its schools. As a Times investigation indicates, the results have been less than benign, with less than 10% of high school seniors being "college ready" on reading tests,

Detroit schools have long been in decline academically and financially. But over the past five years, divisive politics and educational ideology and a scramble for money have combined to produced a public education fiasco that is perhaps unparalleled in the United States. While the idea was to foster academic competition, the unchecked growth of charters has created a glut of schools competing for some of the nation’s poorest students, enticing them to enroll with cash bonuses, laptops, raffle tickets for iPads and bicycles. Leaders of charter and traditional schools alike say they are being cannibalized, fighting so hard over students and the limited public dollars that follow them that no one thrives. Detroit now has a bigger share of students in charters than any American city except New Orleans, which turned almost all its schools into charters after Hurricane Katrina. But half the charters perform only as well, or worse, than Detroit’s traditional public schools...

To throw the competition wide open, Michigan allowed an unusually large number of institutions, more than any other state, to create charters: public school districts, community colleges and universities. It gave those institutions a financial incentive: a 3 percent share of the dollars that go to the charter schools. And only they — not the governor, not the state commissioner or board of education — could shut down failing schools. For-profit companies seized on the opportunity; they now operate about 80 percent of charters in Michigan, far more than in any other state. The companies and those who grant the charters became major lobbying forces for unfettered growth of the schools, as did some of the state’s biggest Republican donors... Even as Michigan and Detroit continued to hemorrhage residents, the number of schools grew. The state has nearly 220,000 fewer students than it did in 2003, but more than 100 new charter schools. As elsewhere across the country, charters concentrated in urban areas, particularly Detroit, where the public schools had been put under state control in 1999. In 2009, it was found to be the lowest-performing urban school district on national tests... Detroit was soon awash in choice, but not quality.

It has this on the dynamics of choice, 

Nationally, some charter school groups praise Michigan for allowing so many institutions to grant charters. But the practice has also allowed bad schools to languish: When universities have threatened to close them, other universities have granted another charter. By 2015, a federal review of a grant application for Michigan charter schools found an “unreasonably high” number of charters among the worst-performing 5 percent of public schools statewide. The number of charters on the list had doubled from 2010 to 2014. “People here had so much confidence in choice and choice alone to close the achievement gap,” said Amber Arellano, the executive director of the Education Trust Midwest, which advocates higher academic standards. “Instead, we’re replicating failure.”

The campaign to attract students would not be out of place even in Kota in Rajasthan,

With all the new schools, Detroit has roughly 30,000 more seats, charter and traditional public, than it needs. The competition to get students to school on count day — the days in October and February when the head count determines how much money the state sends each school — can resemble a political campaign. Schools buy radio ads and billboards, sponsor count day pizza parties and carnivals. They plant rows of lawn signs along city streets to recruit students, only to have other schools pull those up and stake their own.

And about the inequitable effects of such unfettered markets and choice in Detroit,

Charter schools are concentrated downtown, with its boom in renovation and wealthier residents. With only 1,894 high school age students, there are 11 high schools. Meanwhile, northwest Detroit — where it seems every other house is boarded up, burned, or abandoned — has nearly twice the number of high school age students, 3,742, and just three high schools. The northeastern part of the city is even more of an education desert: 6,018 high school age students and two high schools to serve them. In a city of 140 square miles, transportation adds another layer to school selection. Few schools offer busing. And Detroit, long defined by the auto industry, never invested much in public transportation. A mile and a half to school can become an hour-and-a-half journey. 

 The verdict after nearly two decades of markets and competition,

For parents, the search remains for good schools — charter or public.

Several lessons from this excellent long form. The point that unfettered markets, or even any unregulated market, can help achieve learning outcomes is pure logical fantasy and does not need any reiteration. I have also blogged several times that over a long enough period, greater choice is more likely to generate sub-optimal outcomes. 

The more important point here is that Michigan tried to expand Charters across the State is quick time and it failed. Doubtless Michigan's already weak education system had made the original challenge even more daunting. But even good school systems will struggle to cope up with the scope of what Michigan did. 

This has great relevance to public policy at large. The challenge is not so much as to produce islands of excellence as to use public policy to improve the general standards across entire systems. And, as the example of choice and vouchers has shown, the two are not exactly similar, maybe even contradictory, set of challenges. Governments in many parts of the world, especially in developing countries, face the challenge of turning around poor performing education and healthcare systems. They are attracted by innovations like Charter schools, vouchers, capitation payment model, health insurance, PPPs and so on in the belief that such initiatives can quickly help improve general standards. But as the example of Michigan and several others from across the world and over time show, the desired transformations rarely ever happen. 

Thailand did not develop its capitation model of healthcare in a few years. It carefully built up its primary care and other public facilities over decades so that when it embraced the capitation model at the turn of the millennium, it had in place the foundations to support the model. Similarly, Finland developed its impressive school system over decades of effort. It struggled over generations to create the present eco-system which values education and teaching.

Transforming poor quality education and health systems take time and are generational projects. It requires careful design, persistent and laborious efforts, close engagement among stakeholders, flexibility in implementation that allows local initiative, enormous patience, and deep tolerance for failures. Unfortunately, the political and administrative dynamics of change are not readily amenable to such long drawn approaches. 

In the circumstances, the best that can be done is to understand the challenge in its true perspective. Then a two-track approach would have to be followed. At one level, the long-term enablers have to be gradually eased in to achieve the transformation. At the more immediate level, there has to be a steady stream of initiatives that respond to political and administrative exigencies and imperatives. I'll try to outline the specifics of such a strategy in coming posts. 

The power of mild preferences

I have blogged earlier, pointing to the famous Schelling chessboard experiment, about how even mild preferences (among agents) can have surprisingly large macro-level general equilibrium effects. 

My examples focused on school choice and the use of vouchers - this on the dynamics associated with how school choice ends up enfeebling public systems and this on how voucher advocates confuse the merits of vouchers with the relative superiority of private schools. Intuitively school vouchers should be great - they enable choice and lets parents seek out the best schools, thereby fostering school competition and generating desirable outcomes all round. Surprisingly, the evidence from across the world (US, Chile, Colombia, Mexico, Sweden etc) in terms of improving learning outcomes (test scores), retention rates, and years of schooling is very mixed. In fact, in the most recent study from New Orleans (post-Katrina) reveals that it lowered learning outcomes. 

Now, Allison Shertzer and Randall Walsh examine neighborhood-level data to study segregation in US cities over the 20th century and comes to similar conclusions. They point to a similar trend contributing to the distinct US urban segregation pattern of white suburbanization and black core, 

Whites began resorting themselves away from black arrivals in the first decades of the 20th century, decades before the opening of the suburbs. Our analysis isolates the channel of white flight from institutional barriers that constrained where blacks could live in cities. We argue that accelerating white population departures in response to black arrivals at the neighbourhood level can explain up to 34% of the increase in segregation over the 1910s and 50% over the 1920s. Importantly, our analysis suggests that, while discriminatory institutions faced by blacks were clearly important, segregation may have emerged in US cities even in their absence simply as a consequence of market choices made by white families... Our results indicate that one exogenous black arrival was associated with 1.9 white departures in the 1910s and 3.4 white departures during the 1920s.

Their conclusion is very important,  

Policies that reduce barriers faced by blacks in the housing market may not prevent or reverse segregation as long as white households continue to resort themselves away from potential black neighbours.

But there may be one more wrinkle to this story. Such policies, whether in housing or schooling, is unlikely to directly achieve its desired objective of increased mixing among communities. But what if the desegregation contributes to attenuating preferences and making mixed habitations less unacceptable? What if it contributes to greater social integration? What if, over a long period of time, the general equilibrium effect in favor of social integration is greater than the similar effect towards segregation? 

The mixed story with school choice and vouchers

Free-marketers hail school choice through vouchers as the most effective strategy to foster competition and improve school standards. However, the evidence on school vouchers has been, at best, mixed. I have blogged earlier, using the logic of Schelling's chessboard experiment, to argue that school choice is likely to lead to 'emergent outcomes' that may be far less benign than expected. 

The Economist draws attention to a study of a very large school voucher program initiated in New Orleans in the aftermath of Hurricane Katrina whose findings its describes as "underwhelming". In 2014, the Louisiana School Program (LSP) assigned more than 6000 students from low-income families from 12000 applicants to 126 private schools through a lottery system. The study by Atila Abdulkadiroglu, Parag Pathak, and Christopher Walters compared learning outcomes for lottery winners and losers in the first year after the program's statewide expansion and find,

This comparison reveals that LSP participation substantially reduces academic achievement. Attendance at an LSP-eligible private school lowers math scores by 0.4 standard deviations and increases the likelihood of a failing score by 50 percent. Voucher effects for reading, science and social studies are also negative and large. The negative impacts of vouchers are consistent across income groups, geographic areas, and private school characteristics, and are larger for younger children. These effects are not explained by the quality of fallback public schools for LSP applicants: students lotteried out of the program attend public schools with scores below the Louisiana average. Survey data show that LSP-eligible private schools experience rapid enrollment declines prior to entering the program, indicating that the LSP may attract private schools struggling to maintain enrollment. These results suggest caution in the design of voucher systems aimed at expanding school choice for disadvantaged students.

Admittedly the results ought to be read with caution and need to be observed over the coming years. But it cannot be denied that the reality with vouchers is at least far more nuanced. Incidentally, the Economist report also points out that post-Katrina, New Orleans' public schools improved dramatically on the back of enlightened leadership.

That scarce trait is more likely than fancy innovations to improve school education in countries like India. Further, in its absence, even innovations are likely to flounder during implementation. Delegating powers to district and local governments, despite all its concerns, is one way to facilitate the emergence of such bright spots. 

The importance of neighborhoods in children's life outcomes

An excellent example of data journalism in the Times that highlight the works of Raj Chetty, Lawrence Katz and Nathaniel Hendren on how neighborhoods - schools, community, neighbors, local amenities, economic opportunities, and social norms - influence life outcomes. Briefly their two studies from the US show that not only do neighborhoods attract those who succeed (or fail), they also nurture success (or failure).

The first study tracked the life outcomes of the children in 4600 families in five large US cities in 1994-98 who won the Moving to Opportunity housing experiment (families living in public housing could enter a lottery in which the winners were offered a voucher to mover to better neighborhoods) lottery. The authors used the natural random selection experiment to track the outcomes of the move on younger and older children (the earlier studies clubbed both and found negligible effects). They also compared outcomes of those who won Section 8 subsidized housing vouchers which did not require moving to better parts of the city. The Times summarizes,

The children who moved when young enjoyed much greater economic success than similarly aged children who had not won the lottery. And the children who moved when they were older experienced no gains or perhaps worse outcomes, probably the result of a disruptive move, paired with few benefits from spending only a short time in a better neighborhood... those who moved as a result of winning this voucher before their teens went on to earn 31% more than those who did not win the lottery. They are also more likely to attend college. Other families were awarded Section 8 housing vouchers, which subsidize renting a housing or apartment. But because they did not require the winners to move to better parts of the city, people typically moved to neighborhoods that were better but perhaps by only half as much. As a result, the eventual income gains to the pre-teen children who won this lottery were about half as large... 

But those who were teens when their families won the lottery - the typical child was 15 - saw few years in their better neighborhoods and also had to deal with the disruption of moving. A result is that their incomes were 13-15% lower...the net present value of the extra earnings that will eventually accrue to a child who moved at age 8 is $99000, meaning that for a family with two children, the program yields $198,000 in extra earnings. 

The second study uses earnings records to effectively track the careers and neighborhoods of 5 million people over 17 years. It reinforces the MTO experiment,

The earlier a family moved to a good neighborhood, the better thee children's long-run outcomes. The effects are symmetric, too, with each extra year in a worse neighborhood leading to worse long-run outcomes. Most important, they find that ech extra year of childhood exposure yields roughly the same change in longer-run outcomes, but that beyond age 23, further exposure has no effect. That is, what matters is not just the quality of your neighborhood, but also the number of childhood years that you are exposed to it. 

This graphic is a cognitively striking description of the study.

Here is the interactive graphic that shows how much extra money a county causes children in families (at different income levels) to make when compared to children in poor families nationwide.

The challenge here is the difficulty of designing public policies that enable such mixing. As Thomas Schelling has shown, experiments with forced de-segregation face formidable challenges, and the headwinds are even more adverse in societies like India. I have blogged about it here, here, and here.

Update 1 (10.05.2015)

Mathew Martin has this to say about the findings,

Chetty and Hendren's dataset includes only families that voluntarily chose to move under the status quo. The fact that they chose to move suggest that they had something to gain from the move, such as, for example, relatives or a lucrative job opportunity--things that would benefit the kids. Take those away, and it's not clear that moving actually does benefit kids. I mean, surely, there exists someone who is better off living in Hamilton county than Warren.

More on education vouchers

Liberals, following the arguments of Milton Friedman, claim that school choice through the use of vouchers would improve outcomes. Parents would use the vouchers and vote with their feet, thereby encouraging competition among private and public schools and improving learning outcomes. But do they?

The latest evidence to the contrary comes from Sweden. In the early nineties, Sweden instituted far-reaching reforms by introducing school vouchers, which has paved the way for Sweden having more children going to private for-profit schools today than in any other developed country. However, despite encouraging early signs, evidence from the latest PISA ratings show a steep decline in the performance of Swedish children.

This prompted a massive external regrading exercise of the nation-wide standardized tests administered in 2010 and 2011 on over 50000 students of all grades in over 700 schools. The objective was to examine the quality of grades achieved by students in the standardized tests, which, unlike the SAT tests, are graded locally, often at the same school where test takers are enrolled. A study of the results by Bjorn Tyrefors Hinnerich and Jonas Vlachos found,

In Sweden, according to the study by Hinnerich and Vlachos, the scores issued by external evaluators were indeed harsher than those assigned by internal graders. And after accounting for things like a school's location, along with basic student characteristics, it turned out that the external evaluators had downgraded the scores for students at voucher schools much more than for students at government ones. In fact, a sizeable portion of the much-vaunted out-performance of voucher school students could be chalked up to nothing more than easy grading. More surprising still, the voucher school grade inflation is almost as high for math and science (where you'd think an answer is either right or wrong) as it is for Swedish. 

So why did competition fail to generate the desired outcomes?

In Econ 101 we learn that markets work their magic when buyers and sellers are well-informed about what's getting bought and sold, and can therefore transact with one another without fear of getting conned. The apparent failure of the Swedish schooling experiment is a lesson in the inability of markets to solve problems where it's hard to compare the educational "product" that's offered, and the outcomes you can observe are subject to manipulation. It's also a reminder that the cold, hard calculations of markets aren't necessarily suited to the realm of education. Governments don't shut schools because they fail to turn a profit. Private equity firms do. The parents of more than 10000 students learned this difference the hard way last year, whern the Danish private equity group Axcel abruptly announced its exit from the Swedish school market, stating that it could no longer cover the continued losses.  

Market competition and student learning outcomes

The latest PISA report is out. The big stories are the expected consolidation at the top by the East Asian countries and the surprising decline of the poster child of school education, Finland.

An equally interesting story is the even bigger decline of another traditional high performer, Sweden. In the 2006-12 period, it has fallen precipitously from 21st to 38th position in Math and 10th to 37th in Reading, both easily being the worst performances in the respective categories. What explains this trend?

Interestingly, over the past two decades, Sweden has undertaken certain fundamental reforms in its education system, most notably the increased involvement of private sector. Private, for-profit schools, Friskolas, were allowed, and parents were given tax-funded vouchers to pay for a school of their choice. The result is that almost a quarter of the country's secondary school students attend voucher-funded private schools, almost twice the global average. A recent report wrote,

Sweden replaced one of the world's most tightly regulated school systems with one of the most deregulated.. . The private schools brought in many practices once found exclusively in the corporate world, such as performance-based bonuses for staff and advertising in Stockholm's subway system, while competition has put teachers under pressure to award higher grades and market their schools.  

Many of the outcomes were completely predictable. Private participation and deregulation was accompanied by the inevitable problems of deteriorating quality. The Schools Inspectorate has found high-profile cases of private operators focusing merely on getting students to pass-grade instead of improving quality, stocking up on temporary teachers without required qualifications, and schools without adequate facilities. And the inexorable logic of choice,

As the best students flock to certain schools, standards suffer at the schools they leave behind. 

For the researchers and education "experts", who spend millions of dollars with sanitized micro-experiments of all kinds to assess the effectiveness of school-vouchers and private participation in education, the results from Sweden should be of much greater interest. In particular, Sweden's experience has much to enlighten about the debate about school vouchers. Furthermore, it is also a very good test case for the scaled version of the school voucher system, private participation, and deregulation. Since it has been on for nearly two decades, its general equilibrium effects are a more reliable barometer of such complex reforms.

Correlation is not causation. But neither is experimental research the gold-standard for determining causation. My only brief here is that we need to tread with extreme caution with such profound school reforms. Any aggressive push for private participation in schooling, especially in countries with weak state capability, is most certain to fall far short of expectations.

The PISA test assesses math, reading, and science competencies of more than half a million 15-16 year-olds in 65 countries/regions representing 28 million children of that age group. It is widely acknowledged as a touchstone for schooling excellence, including conceptual understanding, in all major countries of the world, except India!

School choice debate resurfaces

The school vouchers movement gets a boost from this study (pdf here) of the privately funded New York School Choice Scholarship Program. The Foundation offered scholarship, worth $1400 per year (1998 dollars), to approximately 1000 low income families with children of elementary school age for a period of three years to attend private, religious, or secular schools of their choice in New York.

The study tracked the different outcomes, including college going behavior, of 2666 students over more than a decade. Though it saw no significant effects on college enrollment, it found that using a voucher to attend private school increased the overall college enrollment rate among African Americans by 24 percent. They write,

We find evidence of large, significant impacts on African Americans, and fairly small but statistically insignificant impacts on Hispanic students. A voucher offer is shown to have increased the overall (part-time and full-time) enrollment rate of African Americans by 7.1 percentage points, an increase of 20 percent. If the offered scholarship was actually used to attend private school, the impact on African American college enrollment is estimated to be 8.7 percentage points, a 24 percent increase. The positive impact of a voucher offer on Hispanic students is a statistically insignificant impact of 1.7 percentage points... The impact of an offer of a voucher was to increase full-time college enrollment rate by 6.4 percentage points, a 25 percent increment... If the scholarship was used to attend a private school, the impact was about 8 percentage points, an increment of about 31 percent. No statistically significant impacts were observed for Hispanic students.

Now I have blogged here and here in some detail about the challenges associated with school vouchers. Contrary to its logical (and economic) simplicity and attractiveness, there is limited empirical evidence on the efficacy of vouchers in improving educational outcomes (read learning levels). The results from the pioneer in school vouchers, Chile, has been disappointing. In the US too, the gains have been limited, mostly confined to small gains with African Americans (something affirmed by the present study). These gains could be easily attributed to the widely acknowledged greater discipline and teacher-student interaction in the median private school over the median public school.

I presume that the obvious objectives of school choice would be to improve non-learning related outcomes (increase enrollment and retention rates), improve student learning levels, and also make the public school systems more competitive. Consider the first objective. In fact, the more worse the public school system, the higher would be the gains in all the non-learning outcomes. The New York study does not dwell much on the learning level improvements and prefers to confine itself to improvements in non-learning outcomes like enrollment and college attendance. On learning levels itself, there is very limited evidence that school choice is effective. On the effects of competition, while I am not aware of any empirical studies, I have blogged about the possible forces that would be generated from a school voucher program, which is most likely to climax in further enfeeblement of public school systems.

In any case, it may be inaccurate to evaluate the impact of school vouchers in isolation from the relative differences between private and public schools. In developing countries, most students given a choice are likely to choose private schools. Assuming the average private school in most developing countries to be superior to the public school, atleast in discipline and teacher interaction, certain outcomes are inevitable - attendance and therefore some marginal improvements in learning levels, higher retention and college enrollment. Do we attribute this to school choice or the mere fact that the private school is superior?

However, if the choice is between competing private schools, there may be some merit in a school voucher program, especially in cities. But here too geographical and other considerations may often end up preventing parents from exercising the desired choice, even more so among children from underprivileged backgrounds. Then the issue becomes one of the parent being fortunate enough to have a good private school in the neighborhood and therefore being able to send his/her child to that school.

In other words, the randomized trial to evaluate school vouchers is effectively one that evaluates the relative effectiveness of private and public schools. This is a larger and entirely different issue. And herein lies the heart of the matter. How do we improve public school systems? In particular, are there positive externalities from the presence of private schools, both natural and policy driven, that can be leveraged to improve public schools?

The best that can be said about school voucher program is that when run concurrently with efforts to improve public schools systems, it can have all round beneficial effects. It can become one more instrument to improve the competitiveness of public schools. In its absence though, it will merely promote the agenda of backdoor privatization of school education.

More on urban housing projects - lessons from Atlanta

This blog has consistently advocated that the public housing policy for urban poor in India move away from a strategy that aims to provide ownership rights to one that builds up housing stock and then rents them out. I have also argued that the rental allotments should be made through vouchers, with the beneficiaries having the flexibility to redeem them in private housing units.

This is largely similar to the public housing policy in the US, where 2.2 million people live in public-housing units (spending an average of 8 years) and another 5 million live in private, voucher-paid housing (spending an average of 6 years). Public housing rents are fixed at 30% of household income and the vouchers, in place since 1974, costs the taxpayers $18 bn annually.

The public housing is dominated by extremely poor single-parent families (53% of public-housing households nationwide earn less than $10,000 a year, and only 13% have two adult residents), who also have an incentive to remain unmarried or maintain live-in relationships due to the manner in which rents are fixed (as a share of the household income). A large number of these dwellers have lost their jobs and have stopped looking for jobs, and these areas are characterized by high incidence of gangs and drugs, crime and violence.

Howard Husock has an interesting article where he explores the apparent success of Atlanta Housing Authority (AHA) with its public housing project reforms for the past two decades. The city's 14000 public housing units have been razed down to facilitate re-development on public private partnership mode and only 2000 are now left, mostly for the elderly. Private developers dedicated 40% of the new private housing units to tenants who qualified for public housing. Two-fifths of the residents re-located into these "mixed-income" complexes, while the remaining three-fifths received housing vouchers and used them to move into other private apartment buildings.

Further, unlike elsewhere in the US, the AHA also imposed a condition in 2004 that all the residents of these units - both the mixed-income complexes and those using voucher and living in ordinary apartment complexes - should work or atleast be enrolled in training programs. The work-requirement has evidently been successful - recent figures show that 62% of AHA-supported households are employed, up from just 18.5% in 1994, and most voucher recipients are re-certified as being eligible.

In operation for nearly a decade, these mixed-income units are well-maintained, with the remaining 60% of renters paying the market rates. Once the public housing units were razed down, crime has fallen, property values have risen and the hitherto blighted surrounding areas have developed.

Apart from the hardware issues, the re-settlement program was complemented with considerable efforts at "human transformation" - extensive and long-drawn personalized counselling for families to instil a culture of ambition, discipline, caring for children's welfare, healthy lifestyle etc. The services of non-profits and people who have moved out of these units were deployed in this effort. In the 2002-09 period, the AHA has spent more than $25 m in providing such counselling services to nearly 15000 people.

There are important lessons for policy makers, especially those trying to re-develop slums in-situ, even in countries like India with the AHA experiment. The business model of the private developers of the mixed-income housing societies should provide insights for developers in India. This assumes significance given that one of the greatest concerns for private developers is with the commercial viability of such mixed housing estates where atleast some of the existing slum-dwellers are re-settled.

The back-room support mobilization for such projects is an unheralded but critical determinant to the success of such re-settlement projects. It also underscores the critical role of human transformation in ensuring the success of such housing projects. Investments in this direction form the last priority for policy makers involved in such housing projects.

Addressing India's employment challenges

Here is my Mint op-ed on addressing arguably India's biggest economic challenge - providing employment to the millions joining the work-force.

More on vouchers and school choice

I have blogged earlier about the utility of vouchers as a means to promote school choice for students and thereby increase competition among schools and improve educational standards. Economists like Gary Becker have claimed that vouchers are more efficient and effective alternative to subsidized public schools. Karthik Muralidharan has this excellent articulation of the effectiveness of the voucher program in improving educational outcomes.

However, evidence from the evaluations of school voucher programs in Latin America suggests that the verdict is far from conclusive. Further, it can also be argued that school choice and vouchers, while improving choice for children, is less likely to improve the general educational standards.

Theoretical analysis of social and public interventions by governments, with its defined set of various logically consistent outcomes, will tend to exclude those outcomes that are an unpredictable (or unexpectedly emergent) result of the multi-dimensional interaction between the myriad agents, institutions, and the larger environment. There are far too many factors (to always accurately factor in), whose complex interaction unleashes unpredictable dynamics that tend to deflect outcomes from those expected or forecast.

In the case of voucher interventions, it may be too facile to assume that once we provide choice, parents - rich and poor - will send their children to the better schools (private or public) and in the process incentivize schools to remain competitive and also have a mix of rich and poor children. This works on the assumption that parents school choice decision is a function of only school quality (defined mainly by student performance records) and affordability (in terms of fees) is the only constraint facing them.

However, in practice it has been found that there are a myriad other constraints facing parents when they make school-choice decisions. For example, some of the commonest entry barriers to private schools, faced by children from poor families include large and unaffordable expenditures on school uniforms and books, extra-curricular activities and so on. Then there are the institutionalized social and cultural constraints associated with studying in such environments, that are more debilitating on children from underprivileged families. Geography, in so far as the good private schools are likely to be situated closer to or within richer areas and away from the poorer areas, may also play an important role in determining school choice.

These socio-economic environment specific constraints exhibit varying strengths, which in turn plays a crucial role in determining outcomes. In the real world, they can even dwarf the beneficial effects of school choice. Here is just one illustration of how these factors interact to produce sub-optimal or even adverse consequences.

In an environment where government schools are impervious to competitive pressures (say teachers have assured employment and schools cannot be closed down) and where societal forces (say, caste or religion) exert considerable influence, vouchers may achieve limited success and could even be detrimental. It could end up "crowding out" the best and brightest among the poor children in the locality away from the government schools and into the private school, thereby depriving these government schools off the valuable positive externalities generated from the presence of these children. (Note: In case of these children, some of the aforementioned constraints are overcome through scholarships, the positive externalities enjoyed by the private school due to their presence etc).

The government school would therefore be deprived off its best talents and the resultant positive externalities on the remaining children. In the circumstances, the vouchers could end up making private schools more competitive and leave the government schools even more impoverished. The private school, by attracting the best talent, becomes even more segregated (performance-wise) from the government schools, and a two-track schooling system, with even greater outcome disparity, emerges.

The result is that the final outcomes mirror the different versions of Schelling's chessboard experiment, with its distinct pattern of segregation. The good private schools will end up cherry-picking from the full range of students, rich and poor, and thereby benefit from the presence of good students and good teachers, while the government schools, especially in the poorer areas, will be left with the remaining students.

The aforementioned example is yet another instance of market failure that leads to outcomes that lets efficiency trump over fairness. In the process of allocating schools based on individual choice, it is presumed that the most efficient set of outcomes emerge. However, this efficiency overlooks the strong possibility of unfairness in the emergent outcome, an eventuality which often leaves government schools and its students short-changed.

All this does not mean that vouchers are ineffective, but only highlights the importance of socio-economic constraints that play a vital role in determining the final outcomes. It is therefore important that the socio-political and economic environment in which vouchers are implemented is carefully analysed and factored into any such policy decision. In other words, vouchers require a complementary set of policies for their success.

As I have blogged earlier, urban areas, with its more competitive government schools, smaller geographical limitations, favorable communal and racial mixtures, and much larger spectrum of choice, are a more likely context for successful implementation school vouchers. The costs associated with the possible failure of a voucher program (in improving standards in government schools) is far smaller in urban environments than in rural areas.

Mundell on who and what caused the crisis and the way out

Dani Rodrik points attention to an excellent and informative presentation given by Robert Mundell on the financial crisis and the international monetary system. Prof Mundell touches on several interesting and controversial issues like the role of soaring dollar, decision to let Lehman fail, dated spending vouchers, nationalization, euro-dollar currency system, a global lender of last resort, global currency etc.

1. The soaring dollar (the dollar appreciation overvalued US dollar assets including all fixed income securities and mortgages, tipping Lehman Bros and other banks over the edge) and falling gold price in August-September 2008, were symptoms of a shortage of tight money (despite the low interest rates) and dollar liquidity. "Had the FED recognized this shortage and bought foreign exchange to prevent the appreciation, there would probably have been no financial crisis in the fall. The Federal Reserve cut off the economic recovery in 2008(2) and tipped the economy into recession and financial crisis".

2. He claims that there was a recovery in the second half of 2008 in the US, with growth of 2.8%, which was nipped off by the policies of the government and the Fed. The decision to let Lehman fail exacerbated the crisis, greatly increasing the demand for money further, creating the casualties that followed. The failire to effectively intervene to stem the rise of dollar exacerbated the liquidity squeeze.

3. The five goats that caused the crisis
a) Lewis Ranieri - the bond trader who is credited to be the "father of securitized mortgages"
b) Bill Clinton - for repealing the Glass-Steagal Act, "prompting the era of the superbank and primed the sub-prime pump" and liberalizing the norms for mortgage lending.
c) Alan Greenspan - for keeping interest rates too low, dollar too weak, for too long, leading the housing bubble to develop; supporting sub-prime lending and variable rate mortgages; and defending derivatives.
d) Maurice Greenberg (AIG founder) - for conducting vast business in credit default
swaps (CDS) and mass multiples of derivatives.
e) Ben Bernanake - for allowing dollar to soar as the euro fell from above $1.60 in June to below $1.30 in October 08 and failing to appreciate that this appreciation would freeze the credit markets causing extreme shortage of dollar liquidity.
f) Hank Paulson - for letting Lehman fail and failing to recognize the consequences of dollar appreciation.

4. The five "trouble makers" were - securitization of mortgages (cut link between issuers and holders); derivatives (created new systemic risks);Credit-Default-Swaps (enabled insurance without ownership); Mark-to-Market Accounting Rules (created intertemporal instability in balance sheets); and Variable Rate Mortgages

5. He gives six prescriptions for the crisis
a) Issue $500 bn Dated Spending Vouchers (to expire in 3 months) to increase effective demand. Retailers would use the executed vouchers as tax credits.
b) Cut corporation tax rates from 35% to 15% to allow recapitalization of corporations and increase competitiveness.
c) Government takeover and restructuring of insolvent banks for subsequent privatization to rehabilitate the banking system.
d) Stabilize dollar-euro rate with the euro fixed at limits between $1.20 and $1.40 to avoid beggar-thy-neighbor exchange rate opportunism. The stabilization can be done gradually by creating a band of fluctuation at the margins of which the banks intervene and then narrow the band as the FRB and ECB get more comfortable at coordinating monetary policies. The dollar-euro rate to be the new anchor for the international monetary system around which an international currency can be based.
e) Establish an International Macroeconomic Advisory Council as a global version of the Volcker-Chaired Obama Advisory Council to deal with the coordination of international macroeconomic policies.
f) Issue 1 Trillion SDRS to IMF members in proportion to quotas or according to a new formula introduced to distribute the seigniorage more equitably. This would provide public money to especially the smaller countries who do not have a lender of last resort. It would also prevent the collapse of the banking systems in the rest of the world.

6. He advocates a global currency, if need be among the Asian economies, as the long run goal. He also prefers a single unit for quoting prices on major commodities, a common unit for denominating debts, a common rate of inflation for participating countries, a common interest rate on risk-free assets, and a global business cycle.

Schooling and domicile in the US

Education upto the high school in the bastion of the free market is a predominantly government monopoly. Public schools in the US provide free education and generally maintain very good standards, whereas private schooling is very expensive and most often inferior to the public schools. Local governments spend considerable resources and attention towards maintaining standards and infrastructure in these schools. Public schools are therefore the preferred schools of choice for both rich and the poor.

In contrast, public schools in India are epitomes of neglect and apathy. The rich and even the middle class have fled government schools leaving only the children from poor families, and that too out of compulsions arising from the high costs of private education. It is ironical that in a developing country like India, basic education is increasingly being dominated, atleast in the urban areas, by private schools, whereas public schools are the overwhelmingly dominant service providers in the US.

The public schools in the US are run by the local town councils, and financed by the property and other local government taxes. These schools are also accountable to very active Parent Teacher Associations (PTAs). Admission in these public schools are restricted to the local tax paying residents. Unlike in India, it is not possible for residents of one town to send their children to the neighbouring town which has a better public school. Public school admission is therefore determined exclusively by the place of residence. In other words, the sole criterion for admission to a public school is local domicile.

With public school standards varying across towns, school quality becomes one of the most important (in some cases the most important) determinant of domicile. Localities with good quality public school becomes an attractive location for prospective home buyers, and this demand in turn bids up land and house values in these areas. The higher property values translates into higher property taxes, which in turn generates more money for the school, thereby further improving the school quality. It also sets in motion a virtuous positive feedback on the quality of education, as these parents are more likely to be demanding on school quality standards.

There is a flip side to this arrangement. The higher property values attracts the richer and more well off and makes the area unaffordable for the poorer. So we have school choice driven agglomeration economics, which results in socio-economically segregated areas. This emergent phenomenon is discussed in an earlier post here.