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Joe Stiglitz, Bill Maher, And The Answer To A Long-Standing Question Of Mine…

June 25th, 2012 · 14 Comments
Books · Uncategorizable

Dear Bill Maher,

I’m gonna level with you- you and I have pretty much the quintessential love-hate relationship going on here. (Granted, this relationship is most likely asymmetric in a rather Red Sox-Yankees sort of way.) Sometimes I think you are super funny and insightful and just want to sit and smoke some weed with you, and sometimes I kind of want to punch you in the face. (The latter attitude is largely a result of that time that Simon Johnson tried to teach you something about math and you covered your ears and went “lalalalala” like a small child. Willful ignorance is not endearing or funny, for the record.)

That said, I very much respect that you have real people on your show and not just the Christine O’Donnells of the world. Case in point: Joe Stiglitz, Columbia professor and winner of the 2001 Nobel Prize in Economics:

Now, I am pretty sure that Stiglitz is making the media rounds in support of his latest book, The Price of Inequality: How Today’s Divided Society Endangers Our Future, and you distracted him with a discussion regarding the financial crisis, but that’s okay because it was pretty entertaining. (The random misunderstandings between you and Stiglitz are also worth a chuckle, mostly because I can’t tell whether they were on purpose or whether you just aren’t good at talking to nerds. I will also give you full credit for making potentially relevant Three Stooges references.) You did lose me a little, however, when you tried to tell me how much tickets to Disney World *should* cost- granted, Disney may have a monopoly on Disney World, but Disney World seems pretty full at a price point of $87 per ticket, so I’m not sure how $28 tickets and mass shortages would make things better. (It’s also worth noting that I find Stiglitz’s outrage over student loans to be a little surprising- I, for one, am glad that student loans are not expunged during bankruptcy, since this makes financial institutions more willing to issue student loans and means that I don’t pay as much of an interest rate premium to compensate for those people who declare bankruptcy rather than paying their loans. But I digress.)

What I find particularly interesting is that you seem to have taken a shine to Prof. Stiglitz because he appears to share your ideological views on topics such as income distribution and inequality. I don’t want to disappoint you too much, but I have a suspicion that Joe is, for the most part, less ideological than you would like to believe. For example, in his recent book excerpt in Vanity Fair, Stiglitz argues that inequality is bad not because it’s not fair but because it’s not efficient and doesn’t even always benefit those at the top of the wealth pile. He even goes so far as to use the statement “Put sentiment aside.” Granted, he does make some strong generalizations about the social value created by top earners and the benefits of explicit redistribution, but, in general, his logic is sound on an objective level and not too much of an ideological rant. (I just wish he would be more careful about implying some sort of “use it or lose it” mentality regarding income and consumption and leaving investment almost entirely out of the equation.)

On a random note, I really like that Stiglitz gives the best explanation that I’ve ever seen of the concept of an “economic rent,” since I’ve wondered for a while now why rents were called rents:

The word “rent” was originally used, and still is, to describe what someone received for the use of a piece of his land—it’s the return obtained by virtue of ownership, and not because of anything one actually does or produces. This stands in contrast to “wages,” for example, which connotes compensation for the labor that workers provide. The term “rent” was eventually extended to include monopoly profits—the income that one receives simply from the control of a monopoly. In time, the meaning was expanded still further to include the returns on other kinds of ownership claims. If the government gave a company the exclusive right to import a certain amount of a certain good, such as sugar, then the extra return was called a “quota rent.” The acquisition of rights to mine or drill produces a form of rent. So does preferential tax treatment for special interests.

At the very least, now I can sleep easier at night not having to wonder where ubiquitous economic terms come from.


Tags: Books · Uncategorizable

14 responses so far ↓

  • 1 Marc Cuevas // Jun 25, 2012 at 6:15 pm

    “I, for one, am glad that student loans are not expunged during bankruptcy, since this makes financial institutions more willing to issue student loans”

    You seem to willfully ignore the obvious upward pressure on college tuition prices caused by this and other government policy intended to subsides student loans. While your correct that this does increase the abundance of student loans and artificially lower the interest rate of these loans, the overall long-term effect has been an incredible amount of price inflation in this sector. Rendering the benefit to students null, and in reality mostly functioning as wealth transfer to the educational institutions.

  • 2 Dan Thorn // Jun 25, 2012 at 7:57 pm

    I agree, your conclusion on student loans is distracting. Do you really think the data support this notion that the ABILITY to file for bankruptcy raises borrowing costs for a wbole class of borrowers? All sorts of triple A borrowers have the ability to both borrow at low rates AND file for bankruptcy. It would be a tough set of number crunching to show that student loans as a group are different. Student loans as a group are exceptionally good credits as by definition for many reasons, as you know.

  • 3 Berriewine // Jun 25, 2012 at 8:12 pm

    But allowing student loans to be discharged in bankruptcy will not curtail rising tuition. More people may willingly take on more debt and tuition would rise even further. It exploits a moral hazard. Although, in a world where a degree become more and more essential, I don’t know how you can fix the issue.

  • 4 Dan Thorn // Jun 25, 2012 at 8:48 pm

    Tuition increasing above the average inflation rate is likely an example of Baumol’s cost disease: education has below average productivity. Increase productivity and slow the relative increase. More likely, subsidizing education is the practical solution.

    Not that education costs or student loans are the point of your post, but you have me thinking about it now. If I were to start with a conjecture, I would start with the exact opposite premise you posit. That is, not allowing bankruptcy for a type of loan causes trouble. Why would that be the case? well, lenders have no incentive to discriminate and will begin to lend to lower quality credits. Now, clearly bankruptcy was not the only issue, but none-the-less, barring bankruptcy was a part of the housing credit mess.

    The idea that banning bankruptcy HELPS the borrower is so backwards it just has the fingerprints of the banking lobby all over it. I am suspicious.

  • 5 EconoNerd // Jun 26, 2012 at 1:32 am

    “Sometimes I think you are super funny and insightful and just want to sit and smoke some weed with you, and sometimes I kind of want to punch you in the face. ”

    Oh Jodi… Did I forget to mention that you’re one of my all-time favorite economists? Including the ol’ Neo-Keynesians that I have a soft spot for, like Solow and Samuelson!

  • 6 Lucas M. Engelhardt // Jun 26, 2012 at 7:32 am

    I agree that allowing student loans to be expunged during bankruptcy would make them less available (via credit rationing). If we allow student loans to be expunged then virtually every college student would declare bankruptcy the day after graduation, since fresh college graduates tend to have negative net worth.

    However, I’m not convinced that that’s a bad thing. As others have noted, fewer loans would suppress demand for a college education, holding down tuition costs..

    On the other hand, I’m somewhat doubtful that increases in tuition reflect the true increase in costs. If tuition goes up a lot, and then colleges increase scholarships, then the true cost may not increase much at all. This is a point where the tuition data is misleading unless we adjust it for student aid – and I’m pretty sure we rarely do.

  • 7 Dan Thorn // Jun 26, 2012 at 7:57 am

    Well, private student loans only became non-dischargeable in 2005 with the passage of the bankruptcy reform bill. Prior to that, graduates did not use bankruptcy to scam lenders, after that lenders did not reduce the interest rate on the loans. Both assertions being made here are empirical and should be examined against the data.

    The idea that “fewer loans would suppress demand for a college education, holding down tuition costs” is one-sided. What about the supply curve? on this logic, the best way to lower the price of cars would be to ban auto loans, and we’d all have cheap cars. Goods have costs and suppliers need to earn a profit.

    The confusion here, perhaps, is that the ‘cost’ of the education means the ‘price’ to the student, but it means the ‘cost’ to the university. Do private universities have higher profit margins now than 50 years ago? and does that increase in margin explain the increase in the price students pay? I doubt it. The price to the student is going up because the cost of the university is going up. lowering demand by removing the option to borrow will result only in shifting the demand curve, not the supply curve and all we’ll end up with is less education. Why would that be good?

  • 8 Punditus Maximus // Jun 26, 2012 at 5:03 pm

    What are your thoughts on direct Federal loans?

  • 9 Carter // Jul 1, 2012 at 2:10 pm

    @Dan Thorn, I think the idea of getting rid of government supplied student loans is a commendable idea for keeping tuition cost down because there is no market in that scenario. i.e. The cost of diverted capital is not born by the lender – gov – who has no worries about misallocating scarce capital. The schools also have no incentive to lower tuition. Without government supplied student loans, schools and students would have to meet in the middle to make it work. In a free market scenario lenders would start to consider the marketability of the student’s desired degree to ensure the loan can be paid back. Currently you can get a $100,000 student loan to become a poor philosophy major who will never be able to repay the loan. Anyways, there is my two cents.

  • 10 Dan Thorn // Jul 5, 2012 at 3:51 pm

    Well, I am not an economist, and the topic at hand is a diversion from Econgirl’s post. But it seems important, and I am intrigued. Having thought about it in response to this conversation, my inclination is to think that student loans have little to do with either the problem or the solution to the rising cost of education AND how to attain (maintain) a highly educated work force.

    The idea seems to be shared by many that reducing the demand for education by not offering loans will lower the price of an education. It seems to me that such a strategy all else equal also lowers the amount of education. I don’t see how that’s a good outcome.

    Education is a public good (in aggregate) and markets are not equipped to handle public goods.

    I doubt the example you give of mis-allocation is a meaningful contributor to the problem – but I am sure there is data to determine that.

    If you want to cite the benefits of Free Markets, I would think you also have to explain why the Free Market is not the best mechanism to lower the price. The Free Market, by theory, responds to high prices by adding supply and thus bringing down the price – why has that not been happening, why is that not the solution?

    It seems clear that the Cost of an education has risen along with the price. How does restricting student loans help lower the cost?

  • 11 Carter // Jul 5, 2012 at 4:23 pm

    @Dan Thorn… There is not much of a free market in education. e.g. Students typically don’t shop for college education based on price. Rather they get into the best school possible and take out a loan to achieve it. The same is true with medicine. The transaction is not between a student and a teacher just as the transaction is not between a patient and a doctor (insurance-doctor). Without a free market pricing mechanism, there can be no real price competition. Part of describing the education problem does not involve quantitative measurements. Some of it is common sense. Children are taught that in order to make lots of money they need college, which is not true. As I have previously described many college degrees are completely worthless. And yet the kids are sold on taking out $100,000 loan. So there is not a single factor that can be tweaked to fix the issue of high education costs. Some of the rising costs come from the government money which bids up prices. i.e. Students bid up the price of tuition. e.g. Harvard turns down many students from attending. ( You might learn in Econ 101 about how real businesses work. If everyday your business sells all the products off the shelves and you can’t take in any more business, the only profit gains come from raising prices.

    On the other side of the coin, since government pays for a lot of schools the schools are extremely wasteful as is any government program. When you are investing someone elses money, it might not break your heart if the investment is a bad one because you lose nothing. Proof? Just look at the lavish buildings which are completely unnecessary for education. I learned how to write server side coding for websites with a $40 internet connection from my bedroom.

    Just take a look at a real educational institution provided by a real company producing real jobs that make real products and real money. Sun Microsystems offers an education which is specifically designed to create productive professionals. For one or two thousand dollars you can get access to every kind of course you can imagine with excellent support. You can take classes in person which cost slightly more than taking them online. Take a look at, where you can learn everything you need to know about economics and history for $99 a year. That’s what the free market provides. No accreditation (whatever that is supposed to be worth anyway) from the government. Excellent education, low cost.

    There is ample empirical, anecdotal, and logical evidence which suggests schools costs so much BECAUSE of government involvement.

    I know you were probably taught that without loving angelic politicians everyone would be stupid, rioting in the streets, and chaos would ensue. Obviously it’s not true. Al Gore doesn’t make the sunshine or the grass grow. Remember, the Federal government got involved in education somewhere around the 40’s, but really jumped in during the 60’s and 70’s. Since then, our literacy rates have dropped, our kids are dumber, costs have sky rocketed. For a group of economists who I know are in love with models and empiricism, this seems like a no brainer. But then again, I didn’t get super smart by going to college. Tom Woods has some talks about how much education used to cost before the Federal government got involved. You won’t believe me if I tell you so just look it up.

    Lastly, the other large factor in rising costs obviously is the counterfeiting of our currency by the Federal Reserve Bank. Duh.

    Tuition graph from ’85 on:

    P.S. I have found many graphs which suggest that everyone today is literate. This is one time where you will have to be skeptical and actually go outside of your house and talk to people. Or look at newspaper articles written 80 years ago. If you think we are getting “smarter” as a society, just look at who we elect to rule over us: OBAMA/BUSH/CLINTON!!! The worst of the worst. Lying scumbag criminals.

  • 12 Dan Thorn // Jul 11, 2012 at 3:11 pm

    Thanks for your thoughtful response Carter.

    Political Economy was the original term for Economics. I am in favor of more frequent use of the term as it highlights that much of the public debate on Economics is over value functions.

    I can see you are passionate about your values. I am not sure how to respond, and I am doubtful this is the venue to respond to your post.

    My interest is in finding a place where I can have conversations about Economic subjects that will help me clarify my own thinking.

    I am also strongly in support of people having the ability to hold wide ranging value functions.

    I am doubtful that ad hominem attacks, and belittling competing ideas support either of these objectives.

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