At Charter School, Higher Teacher Pay – New York Times

A New York charter school opening this year will start teachers’ pay at $125,000. The school’s creator and principal believes that quality teachers, not technology, are what will lead to results for students at his school.

The school’s creator and first principal, Zeke M. Vanderhoek, contends that high salaries will lure the best teachers. He says he wants to put into practice the conclusion reached by a growing body of research: that teacher quality — not star principals, laptop computers or abundant electives — is the crucial ingredient for success.

“I would much rather put a phenomenal, great teacher in a field with 30 kids and nothing else than take the mediocre teacher and give them half the number of students and give them all the technology in the world,” said Mr. Vanderhoek, 31, a Yale graduate and former middle school teacher who built a test preparation company that pays its tutors far more than the competition.

This is certainly an interesting experiment. American schools have struggled for decades to improve results through the implementation countless programs and policies. Lately, one emphasis has certainly been on technology; but this article makes an interesting point: all the technology in the world won’t make a difference if it’s not in the hands of an excellent teacher.

The best basketball players in the NBA make millions more than the average ones. The most skilled doctors are rewarded with the highest salaries. Top lawyers earn hundreds (if not thousands) of dollars an hour while one from a third rate law school toils for $65,000 a year in a county prosecutor’s office. So what’s different about teaching? Why do all teachers in a particular district with a particular number of years experience get paid the same salary? Could you ever imagine all the lawyers in a particular city making identical salaries? The idea is absurd. Clearly the top law firms will pay for the top lawyers, which in turn enables that law firm to achieve the best possible results for its clients.

Yet the vast majority of teachers in America find themselves stuck in a system rooted in an outdated belief in equity, egalitarianism, fairness, whatever you want to call it, where pay is based not on talent, ability, skill, expertise, and all the attributes that determine one’s pay in a competitive labor market like medicine, law, and professional sports; rather the older you are and the more time you’ve “served”, the greater your financial reward. Is it a coincidence that America is known for its cutting-edge medical field, its skilled litigators, and world-class professional athletes. Could someone describe to me the reputation of American public schools? No? I understand, it’s a depressing subject.

In economics we teach the importance of incentives, which when used properly encourage individuals to improve their human capital in as many ways as possible. In other words, if I am rewarded for excellence, I will strive for excellence in my profession. The only incentive in education, it seems, is to grow old and gray, because that’s how I will make more money. Easy for teachers whose only goal is to make it to retirement, right? Without a doubt. Effective for students in a society falling ever further behind other countries in academic achievement? Hardly.

Ironically, some of the teachers most skilled in the application of new technologies and versed in the latest pedagogies are those who grew up learning with those technologies in their own education in a constructivist, student-centered environment. In other words, the youngest, most tech-savvy, who just happen to earn the lowest salaries (practically subsistent in some parts of the country).

Mr. Vanderhoek may be proven wrong. Perhaps it is more technology, more standardized tests, more powerful teachers’ unions, that America’s children need to begin achieving the results that Indian, Chinese, Singaporean, Korean, Japanese, even European students are achieving in the maths, sciences, and other subjects. But if he’s right, then $125,000 (2.5 times the national average for public school teachers) may prove to be just what’s needed attract the kinds of teachers that can achieve results. What if this school does succeed? Will it matter? Or will America’s public schools forever reward teachers not for performance and qualifications, but simply for getting older?

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Job losses worst in five years – Mar. 7, 2008

The news late last week out of Washington was not what the White House was hoping for only a couple of weeks after the passing of a fiscal stimulus package meant to achieve exactly the opposite of what has happened. The US Labor Department released its latest numbers on employment on Friday:

There was a net loss of 63,000 jobs, which is the biggest decline since March 2003 and weaker than the revised 22,000 jobs lost in January. Economists had forecast a gain of 25,000 jobs…

“Based on today’s Employment Report, if we are not in a recession, it is a darned good imitation of one,” said Kevin Giddis, managing director of fixed income at Morgan Keegan.

So with a net loss of jobs, it may seem weird to hear that unemployment has actually fallen from 4.9% to 4.8%. How is this possible? In this case lower unemployment may indicate an even worse reality for the American economy:

The unemployment rate fell because of an increase of 450,000 people whom the government no longer counts as being part of the labor force for a variety of factors, such as that they are not currently looking for work. That drop in the size of the labor force allowed for the modest decline in unemployment, even as the household survey showed 255,000 fewer Americans with jobs than in January.

Discouraged workers point to a deep pessimism underlying households and workers in America, indicating that if we’re not already in a recession, it is only a matter of time. With the apparent failure of fiscal policy at achieving any immediate turnaround in consumer confidence, all eye’s are now on the Fed, America’s central bank, to see how Ben Bernanke will respond to the latest round of bad news.

“Even the silver lining of a falling unemployment rate has a little rust,” said Rich Yamarone, director of economic research at Argus Research. He predicted that the central bank will cut rates by a half percentage point at both its March meeting and again on April 30.

But Yamarone and some other experts questioned whether additional Fed cuts would do much to improve the employment outlook.

“We’re not in a crisis because the cost of borrowing is too high, it’s because people are afraid of lending,” said Dan Alpert, managing director of Westwood Capital, referring to the ongoing credit crunch. “At the end of the day, the Fed cuts don’t really solve the problems. They’ve already cut allot; if jobs continue to decline in face of further interest rate cuts, it’s prima facie evidence cuts aren’t effective.”

But few experts were ready to suggest the Fed would stop cutting rates at this point, given the problems in the economy and financial markets.

“The Fed has to do what it can to provide remedy and not scare the market as well,” said Mike Materasso, a senior portfolio manager at Franklin Templeton.

Central bankers face difficult decisions in times like these. While unemployment and falling growth rates pose significant problems to the American economy, the third macroeconomic evil is certainly in the minds of policymakers when deciding how to deal with the first two: inflation.

In order to lower interest rates, the Fed first has to implement expansionary monetary policy. In other words, the central bank must increase America’s money supply. How does it do this, exactly? Most commonly, the Fed uses open market operations, which is a fancy way of saying the Fed buys and sells government securities (treasury notes, bonds, etc…) on the bond market. When the Fed wishes to lower interest rates, it must inject new money into the economy, which it does by buying government bonds from the holders of those securities; namely, the public.

American banks, households, and firms, as well as foreigners all hold government debt. When the Fed wants to expand the money supply, it simply starts buying these debt securities back from the public. The increase in demand for securities drives up their prices, encouraging holders of the debt to sell their securities to the Fed, for which they receive money in exchange. In effect, the public exchanges illiquid (unspendable) debt certificates for liquid money. Now consumers have more money in their pockets to spend, firms have more to invest, and banks have more to loan out to borrowers who want to spend and invest. How do banks get rid of their new liquidity? Yep, they lower their interest rates.

In a nutshell, that’s how monetary policy works. To combat a recession and rising unemployment, the Fed simply buys bonds on the open market, injecting liquidity into the economy, which should result in more borrowing and more spending, shifting aggregate demand out, leading to growth and rising employment.

But what about that third evil, inflation? Won’t more spending lead to demand pull inflation? Usually this is not a major concern in times of a slowdown, since rising unemployment indicates the economy is producing below its full employment level of output. Expanding aggregate demand should result in increased output and stable prices. Today, however, Americans are facing other inflationary pressures, including a historically weak dollar (meaning imported goods and raw materials are more expensive than ever), and skyrocketing food and energy prices due to rising global demand for such commodities.

This all makes the job of monetary policy exceptionally challenging for Mr. Bernanke and his colleagues at the Fed. Expand the money supply too much (i.e. lower interest rates too much) and you risk accellerating inflation. Keep rates too high, and we can expect even worse employment and output numbers in the next few months.

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FT.com / Asia-Pacific / China – China to focus on curbing inflation

Growth – the ultimate macroeconomic policy goal. Growth leads to improvements in material well-being; by definition it means more output per person. Growth also enriches society in other ways: more tax revenue for governments means more to spend on public goods like education, health care, and infrastructure, which all contribute to development of human capital, standard of living, and productivity. But is there such a thing as too much of a good thing? When it comes to growth in China, that may be the case.

According to Chinese premier Wen Jiabao:

“The primary task for macro­economic regulation this year is to prevent fast economic growth from becoming overheated growth…”

So, fast growth is good, but overheated growth is bad?

I once had a Jeep Wrangler that when I drove it across the country, anytime it hit 70 mph it started to overheat… is that the kind of overheating China’s economy is experiencing? Well, kind of, yes.

The reason my Jeep would overheat was that the pistons in the engine had to move so rapidly to keep the engine going at enough RPMs that the friction created overwhelmed the engine’s ability to properly cool itself. In China, the pistons can be compared to the manufacturing industry and agricultural sectors, which last year were stretched to their limits to meet not only rising demand from foreigners for China’s output, but record levels of domestic demand as well.

For the first time last year, China’s domestic consumption made up a larger component of the country’s GDP than investment. Returning to our metaphor, the engine was forced to work harder than usual, but I hadn’t spent enough to maintain the engine, so it was not properly lubed and tuned for the stress of long-distance travel. Maintenance on an engine is important, otherwise it will wear out and overheat while driving at high speeds over long distances. Likewise, investment in new capital is vital for an economy to keep from overheating as it grows at high rates over long periods of time.

Rising consumption and exports, without a corresponding increase in investment, means capital depreciates too quickly to meet Chinese and the world’s demand for output. In terms of our macroeconomic model, AD shifts out more rapidly than AS, causing inflation:

“the premier said the political priority was to tame consumer price inflation, which hit an 11-year high of 7.1 per cent in January.”

Rising consumption and net exports puts upward pressure on prices in China. To worsen matters, food prices have experienced record increases in the last year, making the matter especially hard for China’s urban poor, separated from the farmland and its produce as they are.

Investment, while an expenditure itself, tends not to contribute to inflation (as might be thought, since it shifts AD outward), but mitigate it, due to the supply-side effect attributable to the increase in capital and productivity that it creates. To combat rising food prices in China, Mr. Wen plans to encourage investment in the agricultural sector through targeted government intervention:

The government would expand agricultural commodity production, strictly control industrial grain use, establish an early-warning system to monitor supply and demand, and strengthen “market oversight” and “price inspections”, he said.

Subsidies for the poor would be increased and provincial governors and mayors held directly responsible for ensuring basic food supplies, said Mr Wen.

Overall China’s picture is looking rather rosy, it would appear. While 7.1% inflation is certainly something to fear, it seems to be manageable in the context of a global slowdown in income growth, and the corresponding decrease in demand for Chinese exports that implies. Combined with a strengthening RMB, China can look forward to a slower rate of growth in 2008, (“a now routine annual ‘target’ of 8 percent expansion in [GDP]“). The trick for the government is to foster investment and productivity growth in the agricultural sector to keep food prices down in the face of growing demand for meat products among China’s middle class.

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In recent years coffee consumers may have noticed more and more cafes are offering “fair trade” coffee as an option. Usually, for an extra 10 or 20 cents per cup, you can get a beverage made from beans that were grown by farmers earning living wages and working in safe and sustainable environments. In some cases, “fair trade” coffee is of higher standards, representing a higher quality product. The premium paid by consumers, in theory, will eventually result in better standards of living for coffee farmers and their families.

Mike Munger, chair of Duke University’s economics department, argues that “fair trade” products, while they may represent good intentions, probably don’t do much to help poor farmers. While the full podcast offers even more reasons, the clip below presents one clear explanation of why “fair trade” may actually make poor farmers worse off.

Munger on fair trade Play Now | Play in Popup | Download (113)

Another interesting point Munger goes on to make relates to one of the models of economic growth we have been studying in IB Economics: the Lewis dual-sector model of structural change. According to the model, the path towards economic growth, which should create conditions that lead to economic development, requires the transition of workers from the low-productivity agricultural sector to the capital-intensive, high productivity manufacturing sector.

China, in its own economic growth, has demonstrated the success of this model, which involved rural to urban migration, employment of surplus labor from the farming sector in the industrial sector, giving workers access to capital, increasing productivity, output, income, saving, and investment, putting an economy on a path towards growth and development.

According to Munger, “fair trade” premiums paid to poor farmers create a disincentive for a farmer to migrate to the higher productivity industrial sector that may be emerging in his country. In essence, coffee drinkers in the rich world are offering a subsidy to farmers in the poor world aimed at keeping them poor. If the path to wealth and prosperity requires the transition to a capital-intensive industrial economy, then subsidies to poor farmers are only reducing the likelihood that they’ll achieve significant increases in income and savings.

Munger’s views are compelling, if a bit hard for a socially conscious, well-intentioned coffee lover like myself to swallow. I like to think that I’m helping farmers in the developing world when I drink “fair trade” coffee. If anything, Munger has at least made me think a bit harder about the true impact of the premium I pay when I choose “fair trade” next time I walk into Starbucks.

For the full podcast, click here: Munger on Fair Trade and Free Trade – EconTalk with Russ Roberts

How do Chinese granite quarries and a decline in the US death threaten a family business in rural Vermont?

Listen and find out…

Chinese headstones [ 4:09 ] Play Now | Play in Popup | Download (4)

Source: NPR Economy Podcast, 2/29/2008 

The Rutherford Institute: A Crisis in Democracy: Are We Going Bankrupt?- Commentary

Environmental Economics blogger John Whitehead wonders whether America is going bankrupt, and if so, what can be done to fix the problem.

According to our text, (McConnell and Brue’s “Economics, 17th ed.”), “The large U.S. public debt does not threaten to bankrupt the federal government, leaving it unable to meet its financial obligations. There are two main reasons why, refinancing and taxation.”

McConnell and Brue argue that when past debt comes due, the US government will always be able to pay its creditors (i.e. the US public, financial institutions, branches of the federal government, as well as foreign banks and citizens) by selling more debt certificates (securities) to others who have faith that the US will continue to meet its debt obligations in the future. This is the equivalent of paying off one credit card with another, incurring even more debt in order to pay off past debt.

However, in the case that the government ever finds it hard to issue new securities, either due to a loss of faith among investors in its ability to repay its debt, or fear of economic instability in US growth, it can always resort to the more drastic measure of actually increasing taxes and reducing spending on public goods, using taxpayers’ money to meet its debt obligations. For these reasons, conclude the textbook authors, the U.S. government is not at risk of bankruptcy.

Or, is it?

According to Whitehead:

The fact that our nation is nearing bankruptcy has become what David Walker, comptroller general of the United States, calls “the dirty little secret everyone in Washington knows.” Most politicians, says Walker, are aware of the impending financial crisis but reluctant to do anything about it. After all, it is not politically expedient to increase taxes or trim spending, but this is exactly what needs to be done…

Walker, who recently resigned after serving as the government’s chief internal watchdog for a decade, concludes that the nation’s “current standard of living is unsustainable unless some drastic action is taken.” But, as usual, when we leave the problem-solving to the politicians, what we end up with is bigger government, more bureaucracy and a larger federal deficit, which is projected to total $410 billion for 2008. (The national debt, which is the total amount of money owed by the government, is currently estimated to be over $9.2 trillion.)

We are living in a house of cards that’s on the verge of crashing around us, and yet most Americans remain oblivious and continue to spend beyond their means. But, as Reich notes, “That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.”

Whitehead believes Americans themselves need to reign in their spending, bringing their expenditures more in line with their incomes. If this is the path to individual financial security, then likewise it must hold true for the nation as a whole. What scares Whitehead more than the growing US public debt, however, is who holds that debt. Today, almost 30% of the $9.3 trillion owed by the US government is owed to foreigners.

According to economist James Galbraith, who Whitehead quotes, this puts to the test the very foundations of democracy, which in the past have relied on the relationship between America’s creditors (the holders of the debt) and the government itself. In 1945, almost all of America’s debt was held by Americans themselves, and the government acted in the interests of the American people. Today, the scales have tipped, and less than 10% of America’s debt is held by American citizens.

Galbraith concludes: “…the disappearance of the citizen-creditor forces a question. Can democracy survive when its financial roots have been cut? The scale of public debt is not the issue, but its ownership is. Can a country—whether the United States or any other—be truly democratic if it is in hock to banks and foreigners? …To put it bluntly, are we still a democracy? And, if not, what would it take to bring democracy back?”

We know what must be done.

First, we need to elect fiscally responsible representatives with the backbone to resist political pressure to spend what is not there. We also need to stop putting ourselves in hock to foreign banks and nations. And we need to put a stop to the financial hemorrhaging related to the Bush Administration’s war on terror. For example, over the past six years, the U.S. has disbursed to the corrupt government of Pakistan about $80 million monthly, or roughly $1 billion a year. Yet according to the Washington Post, few receipts are provided to account for how the money is used or where it ends up. That’s just the tip of the iceberg when one considers that we spend at least $1 billion a week in Iraq on military operations alone. Just imagine how those dollars could be put to use in our own ailing economy.

Certainly a fiscally responsible government would result in security and freedom such as that enjoyed by fiscally responsible individuals, free of debt. But just like the fiscally responsible individual, who so responsibly pays off every credit card every month, getting into the habit of balancing a budget, especially when the budget starts out so woefully unbalanced, poses serious challenges. Here’s an example:

Imagine you’re an individual earning $100,000 a year. Great salary, right? Hold on, you also owe $75,000 in credit card debt. What is the first thing you’d do if you earned an extra $10,000 next year? Go buy a new car? How about take a vacation to Europe? No? Well, what then? Logically, you’d start paying off the $75,000 debt, with the goal of becoming debt free sometime down the road.

This is America today. We’re a country with a national income of $13.5 trillion, and a national debt of $9.3 trillion. Fortunately, 70% of that debt is held by Americans themselves, so we essentially owe ourselves $6.5 trillion. When this debt is repayed, it does not represent a loss of wealth from America, rather a transfer of wealth from Americans to Americans, neither diminishing nor enhancing our overall spending power.

However, every year the share of our debt held by foreigners grows. Today it is around $2.8 trillion, the repayment of which represents a transfer of wealth from Americans to foreigners, making us poorer and them richer.

Tightening our fiscal belts may be tough now, but necessary to restore democracy and financial stability to our nation. This article by Whitehead makes some interesting arguments for steps the U.S. should take now to assure security and prosperity for future generations.

Discussion questions:

1. What do you think Whitehead and other economists who share his views think about the recent fiscal stimulus package passed by Washington?
2. Why don’t politicians seem to take serious measures to balance the US budget and begin paying off its debts?
3. Should we worry about the US debt? Why or why not? Who’s to say we can’t just keep refinancing the debt indefinitely?
4. Are you or is anyone you know in debt? Is personal debt something to be concerned about? Why or why not?

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