Moneybox

Media discussions of "college" or "college costs" tend to get very confused because media people overwhelmingly attended (and expect their children to attend) highly selective institutions of higher education. The big gap is between people who went to very selective private schools (Yale! Princeton!) and those who went to very selective public schools (Michigan! UVA!) while the large majority of Americans who go to much less selective institutions tends to get ignored. In particular, we hear very little about community colleges even though these are the schools that tend to serve the marginal student and where higher education as a ladder of opportunity for low-income people will either succeed or fail.

But here's a striking fact. If you've been paying any attention at all over the past decade, you've heard a lot about states cutting back on their funding of higher education. What you hear less about is that high-end public institutions of higher learning—the "public research universities" in the chart above—have responded to these funding cuts by drastically increasing per student spending in failed effort to keep up with the prestigious private universities who've been ramping up spending in an even more dramatic way. Consequently, tuition hikes have compensated for over 100 percent of of the funding cutbacks. The schools that have truly faced sharp resource constraints are the community colleges that you don't hear about. Their aggregate spending is essentially flat, meaning that due to the magic of Baumol's Cost Disease they've had to respond to funding cutbacks by reducing service levels even while raising tuition. What makes it especially egregious is that these institutions started off spending less to begin with. Community college students have the greatest level of need, but they receive the least resources and they're increasingly pressed but tend to get overlooked in media accounts of funding arguments that instead focus on exclusive schools with a much more affluent client base.

At any rate, I'm inspired to mention this by an excellent new report The Century Foundation put out today (PDF) that takes a look at the divergent fortunes between community colleges and selective schools over the decades. I knew about the funding disparities, and it's obvious that community colleges serve poorer students and more minorities but I didn't know that the socioeconomic gap in student bases has grown over the past 25 years.

New Census Bureau numbers are out today and they show that three of the five fastest-growing cities and eight of the fifteen fastest-growing cities in America are located in the state of Texas.

It's notable, though, that New York City also added an awful lot of people. Of course working from NYC's enormous population base it's not a huge percentwagewise increase. But New York is already very dense and is also very heavily regulated in terms of new housing units, so it's relatively difficult to add population. But big picture Texas dominates in terms of population growth. There's something of a chicken-and-egg issue here where many people (especially policymakers in Texas) say the population is growing fast because the economy is relatively strong. There's something to that (and certainly that's the case in the Midland-Odessa are) but I think it's primarily the other way around. Texas' combination of relatively stringent mortgage regulation, relatively lax house-building regulation, and relatively warm weather have made it a place with abundant and growing supply of affordable housing. That in-migration of people makes Texas a good place to invest in building houses and restaurants and hospitals and shopping malls and all the rest.

"Million Dollar Properties, $1 Deals" was the headline on Patrick Madden's great WAMU report on apparent sweetheart deals that DC property developers sometimes get when they want to build on city owned land. Julie Patel's followup was a little less snappy, but "Empty Promises: Developers Often Don't Deliver" also delivers the goods. These deals often offer sweet discounts on land to property developers in exchange for developers making specific commitments to achieve municipal goals, but real estate development is a highly risky and uncertain industry and often the promises aren't met in a timely manner.

The always-upbeat David Alpert is correct to respond that things aren't necessarily all that bad. For example, when the developers of the project at the former Hines School received $44 million worth of land for the low price of $22 million, they also agreed to offer 20 percent of the new housing units at subsidized rates and to build a new plaza on C Street. The city accepted less money for more amenities.

And good for them. But really all this does is highlight the great virtue of simply selling things to the highest bidder.

After all, accepting less money for more amenities could be a good idea. But it also could be a boondoggle. As a citizen, it's extremely hard for me to tell. What's more, all citizens can agree that $100,000 is worth $100,000 while our estimates of the value of a plaza or a new library may vary. The right way to handle these things would be to sell the land for the highest possible price, and then have the city directly spend on programs elected officials think are valuable. That's a much more transparent process in which it would be obvious whether someone was giving a donor a sweetheart deal or not, and in which the value of a new plaza can be easily compared to other uses of funds.

Every year the Intel Science and Engineering Awards features some extremely impressive young people, but this year's winner—Romanian 19 year-old Ionut Budisteanu—may make an unusually big difference.

His contribution was to take one of the most expensive elements of existing autonomous vehicle technology, the high-resolution 3D radar that Google uses to help cars see objects in the road, and use artificial intelligence to get by with a cheaper radar. Using about $4,000 worth of equipment he got results that are about as good as Google's $75,000 rigs. For his trouble he gets a $75,000 scholarship prize. Eesha Khare, an 18 year-old from California, also did something with some major potential commercial applications and "developed a tiny device that fits inside cell phone batteries, allowing them to fully charge within 20-30 seconds." We're told that "Eesha’s invention also has potential applications for car batteries."

Needless to say, the dual technologies of car electrification and car automation are probably the leading candidates to transform everyday life in a really useful way so this is extremely encouraging news.

The steady day-by-day upward tick of the Nikkei stock index has been the most visible impact of Abenomics in Japan, but overnight things took a scary turn for investors who'd rushed into Japanese shares over the past month or so as the Nikkei plunged over seven percent. It's a sign of how strong the Abe rally has been that this essentially leaves the market where it was ten days ago and wildly higher than it was when Abe took office around Christmastime. Still, any plunge of that size is going to get attention.

The broader context is that some weak preliminary data on Chinese industrial production have Asian markets broadly down, after a day of Ben Bernanke hinting that "tapering" of QE3 was possible not offset by any hint that accelerating it might happen also drove western markets a bit down. Meanwhile survey data out of Europe indicated that France and even Germany are likely in an economic contraction phase.

All things considered, Japan probably had a better news day in terms of the fundamentals than other large markets. But the big upward rise of the Nikkei over the previous six months and the controversial nature of Abenomics seems to have meant that when things took a bearish turn it hit those markets especially severely.

Public policy over the past five years has been a lot kinder to the lords of finance than populist opinion would like, but I think most folks continue to underestimate the degree to which finance is shrinking already under new market and regulatory pressures. A good concrete sign of that is the idea, floated at a conference today by CEO Jeffrey Immelt, that GE might spin off its consumer finance arm.

Once upon a time, General Electric was an industrial conglomerate. When you sell expensive stuff, it's natural to get involved in financing to some extent and thus GE Capital was born. But as the overall U.S. economy financialized, GE Capital turned into a bigger and bigger part of the overall enterprise. Since the financial crisis, however, Immelt has been trying to shrink it relative to the company's core industrial competencies. The idea of the spinoff would be to take that one step forward, by taking financial stuff that's unrelated to industrial work—things like GE's credit card business perhaps—and sell them via IPO. The funds raised by the IPO could then be used for a share buyback. So you'd have a smaller company with fewer shares outstanding, a tighter focus on manufacturing, and less volatility.

It turns out that inflicting deep economic depressions on countries in an effort to inspire pro-growth structural reform can have some negative long-term consquences. Here's the new drug hotness in Greece:

Now a new menace has arisen: a type of crystal methamphetamine called shisha, after the Turkish water pipe, but otherwise known as poor man’s cocaine, brewed from barbiturates and other ingredients including alcohol, chlorine and even battery acid.

A hit of shisha, concocted in makeshift laboratories around Athens, costs 3 to 4 euros. Doses come in the form of a 0.01-gram ball, leaving many users reaching for hits throughout the day. They include prostitutes, whom Mr. Tzortzinis photographed in a seedy central neighborhood of Athens called Omonia, next to a large police station.

Shisha is most often smoked. But it is increasingly being taken intravenously; because of the caustic chemicals it contains, a rising number of users are winding up in the emergency room. Health experts say the injections are also adding to an alarming rise in H.I.V. cases around Greece, which surged more than 50 percent last year from 2011 as more people turn to narcotics.

With scant money left in the government’s coffers, and an austerity program in place until Greece repays hundreds of billions of euros in bailout money, programs for health care, treatment and social assistance have been curbed sharply.

Structural reforms, anyone? Or perhaps some malnourished children will improve the long-term outlook.

Every once in a while when I write about taxes I get asked if I would do a post on my vision of an ideal tax system. It's an interesting idea and I'd like to do it. But it's worth noting that in important respects there's no such thing.

For example, suppose that we legalized commercial production of recreational marijuana, making it available to consumers for a few cents per joint. For both revenue and public health reasons, it would be attractive to impose a marijuana tax that would be enormous in percentage terms. A joint might cost $2 retail with a large percent of the price coming in the form of taxes. But in practice if you put the tax up that high you're going to have a huge black market in marijuana and undermine many of the goals of legalization. So if you're practical about it, you probably need a lower tax combined with some non-tax regulations.

The problem, though, is that once you start thinking about practical issues with taxation it can take you anywhere. For example, suppose we eliminated corporate income taxes and made up the difference with higher taxes on capital gains and dividends. That sounds like a good idea to me, but in practice firms would probably take the opportunity to hoard cash and lobby for a dividend tax holiday. The "ideal" policy would be to refuse to hold the dividend tax holiday! But you're not likely to abolish the existence of political disagreement about the size of the welfare state or the distributional burden of the tax code.

Most generally, any rule you make is going to over time be undermined by the search for loopholes. If you had a broad consumption tax, for example, you might want to exempt college tuition from the tax on the grounds that education is really a kind of investment. And education is a kind of investment. But college is also a kind of consumption. Already colleges often bundle instructional (classrooms) with non-instructional (fitness centers) facilities, and if you tax consumption while exempting tuition then people will find more and more ways to smuggle consumption goods into the tuition category. The right response is going to be to change the rules every once in a while.

For the Very Serious People of the world, whatever the question, the answer is "inappropriately tight monetary policy."

And now that worrying about inflation has gone out of style and the panacea canard is played out, the new hotness is to worry that appropriate monetary policy will lead to financial instability.

This is far too ridiculous an idea to take seriously, but unfortunately it's become clear over the past month that many high-level central bank officials are taking it seriously. And in doing so they're creating a dangerous level of financial instability. After all, do you know what undermines the stability of financial markets? Unpredictable swings in nominal variables. That's why clear guidance from central banks is so good. One can debate the merits of the specific quantities involved, but the basic QE 3 framework entailed some admirable clarity. How long would interest rates stay low? At least until the unemployment rate dropped below 6.5 percent or the Core Personal Consumption Expenditures Deflator rose above 2.5 percent. For any market participant, that was like having some nice bumpers in your bowling lane. No guarantees about the macroeconomic future (there never are) but at least some guidelines. Would you be facing a situation in a year in which unemployment is 6.7 percent, inflation is 1.9 percent, and interest rates are rising because the economy's getting stronger? No. By the power of the Evans Rule that would not be the case.

But today it's no longer clear that that's the case. Between FOMC statements, suddenly everyone's introduced a third completely undefined variable into monetary policy. Fed officials appear to be saying that even if employment and inflation conditions indicate that tighter money would be disastrous, they might do it anyway to avoid "financial instability." But nobody can be sure exactly what that means. Suddenly the future of policy has become hazier. And that itself undermines stability of financial markets.

Ben Bernanke's appearances before Congress are usually a parade of clueless questions, but Sen. Amy Klobuchar of Minnesota just asked him a great one. Noting that some members of Congress think the Fed should drop its dual mandate on inflation and unemployment and just focus on price stability, she asked Bernanke to explain what he would do differently if the mandate changed.

Bernanke hemmed and hawed a bit, but the crux of his answer was: nothing.

He seemed to interpret the question as perhaps an attack on his inflation record, but his answer was a damning attack on his growth record. (His answer starts around the 39-minute mark here.) Bernanke noted that "inflation, if anything, is a little bit too low" and said that even though many foreign central banks have a single mandate: "I think our inflation record is as good as really any major central bank, and so there's not really been a sacrifice in that respect."*

That's a huge tell right there. Bernanke can't name a single way in which his policy would change if Congress rescinded his legal mandate to attempt to maximize employment. In other words, he's ignoring that mandate. The Federal Reserve's attitude with respect to price inflation has been identical to what its attitude would be in a world in which it wasn't legally required to care about inflation. And that attitude is hammering the economy. Normally there's no substantial tradeoff between inflation and unemployment, but things are different at the zero bound. Once nominal interest rates reach zero, the most potent way to reduce real interest rates is to raise expectations of future inflation. Lower real rates mean more investment and more durable goods purchases—in other words more jobs. So right now there is an inflation-unemployment tradeoff, and Bernanke is behaving as if he has no employment mandate.

But he does have an employment mandate. Members of Congress should be following up on Klobuchar's groundwork and asking him about this. So far, though, it's been crickets.

*Correction, May 22, 2013: This post originally misquoted Ben Bernanke.