Gambler's Fallacy In Teacher Evaluation: Reprint of my 2012 blog post, "NYC Teacher Evaluation Scores Show The Irrelevancy of Teachers On Student Test Performance."

Reprint of my 2012 blog post, "NYC Teacher Evaluation Scores Show The Irrelevancy of Teachers On Student Test Performance."

Monday, February 27, 2012

NYC Teacher Evaluation Scores Show The Irrelevancy of Teachers On Student Test Performance

Posted By Milton Recht

Two articles in The New York Times (mentioned below) about the recently released NYC teacher evaluations indicate that teacher quality is not an important factor in student performance. Parents, teachers, media and many educational researchers overemphasize the importance of teacher quality on student learning and student standardized test performance.

Of course, there is more to a good teacher's characteristics than just the ability to teach effectively. In lower grades, a nurturing, reassuring and encouraging personality is probably a trait that most parents and children would like. The ability to maintain discipline and safety in the classroom, without being overly harsh, is another trait parents and students would probably like to see in teachers at all grade levels. Similarly, teachers that instill curiosity or an interest in a particular subject or extra-curricular activity are valuable beyond their ability to improve reading or math scores.

As for student performance on reading and math tests, research indicates that teacher quality is not that important. For example, research shows that teacher credentials, such as certification, advanced degrees, and years of experience in the classroom, do not affect student educational performance in reading and math. See as an example my post, "Teacher Credentials Unrelated To Student Achievement." Also, see results from Teach for America and similar programs which place eager, but not trained in education, recent college graduates into poorly performing schools. These students are very effective in the limited time they are in the schools.

Gambler's Fallacy

Many educational researchers, because of their own prior beliefs in effective teaching, fall into the gambler's fallacy of believing in "hot hands" that certain decks of cards, roulette wheels or slot machines are paying out more than others, when what the gambler is seeing is a momentary random streak of winning hands.

Studies that evaluate teacher impact on student performance over time generally find wide variation in a teacher's effectiveness from one year to the next. If some teachers are more effective than others and the important factor, then why does student performance measurement vary much from year to year? (For example, a recent Harvard study that found that better teachers in the lower grades had an adulthood impact on students and their earnings stated "teacher value-added is not in fact a time-invariant characteristic." and "if true VA [value-added] is mean reverting, deselecting teachers based on their current VA [value-added] will yield smaller gains in subsequent years, because some of the low VA [value-added] teachers improve over time.") These studies find some teachers are better than others because over the time frame measured, on average, they are more effective than other teachers. It is the same as believing in winning slot machines. Over a short time frame, with wins and losses, the researchers see some teachers have a higher winning average than other teachers, confusing a random streak for a measure of the effectiveness of the gambler. Additionally, researchers have found and attempt to control in their studies, that there is student sorting in the schools where some teachers consistently get more of the higher test scoring, better students than other teachers.

NYC Evaluation Results

The data from the NYC teacher evaluations shows that high, average and low scoring teachers are about equally scattered among all the NYC schools, the high and the low performing schools.

From The New York Times, "Teacher Quality Widely Diffused, Ratings Indicate" by Fernanda Santos and Robert Gebeloff:

The controversial ratings of roughly 18,000 New York City teachers released on Friday showed that teachers who were most and least successful in improving their students’ test scores could be found all around — in the poorest corners of the Bronx, like Tremont and Soundview, and in middle-class neighborhoods of Queens, like Bayside and Forest Hills.***They were in similar proportions in successful and struggling schools, and they were just as likely to have taught the most challenging of students and the most accomplished.

From The New York Times, "In Teacher Ratings, Good Test Scores Are Sometimes Not Good Enough" by Sharon Ottyerman and Robert Gebeloff:

At Public School 234 in TriBeCa, where children routinely alight for school from luxury cars, roughly one-third of the teachers’ ratings were above average, one-third average and one-third below average.

At Public School 87 on the Upper West Side, where waiting lists for kindergarten spots stretch to stomach-turning lengths, just over half the ratings were above average. The other half were average or below average on measure, based on student test scores.***The principal cause of the wide variation within schools is the methodology of the ratings, which compares teachers with similar student demographics and scores. For teachers in schools with high-achieving students, good test results are often not good enough, at least by the standards set by the formula.

The NYC evaluations control and adjust for different student demographics, family income, etc. Students from better off families perform better on standardized tests and teachers should not get credit for the higher test scores of these students, especially since the higher scores are due to socio-economics and not teacher effectiveness.

The article mentions that some of the higher income parents were surprised that teachers who they evaluated as effective did not produce test results beyond the expectation for the families' demographic group.

On average, independent of teacher quality, students from higher income families do better on standardized tests including SATs, graduate from high school at higher rates, go to and graduate from college at higher rates than students from poorer families.

Changes that have effect on student performance in school tend to be outside of the classroom, such as an increase in parental expectations of student educational performance, increase in parental literacy, decrease in teenage pregnancy rates, decrease in bullying in school and other factors which are unrelated to teacher effectiveness.

New Regulations Really Do Not Fix Problems: Reprint Of A 2009 Blog Post

Reprint of my March 2009 blog post, "New Regulations Really Do Not Fix Problems:"

Wednesday, March 18, 2009

New Regulations Really Do Not Fix Problems

Posted By Milton Recht

It is unclear that new regulations fix a problem. The causative events of the problem often cease to exist before regulations are proposed. Additionally, many problems that require government intervention to protect the public are usually those that receive a lot of public media attention.

The public and the entities modify their behaviors prior to any regulatory effects. For example, peanut butter sales are down due to the recent salmonella problem [NBC News] and the responsible company closed [CDC]. Peanut butter companies across the US have or are modifying their production processes to prevent a recurrence and parents are choosing other foods for their children.

Undoubtedly, the government will issue new food production regulations and take the undeserved credit for "fixing" the problem. The reality is that regulations are often parallel to the corrective change in behavior, but not the cause.

Since there will be an industry and consumer change in behavior after a negative event prior to regulations, the concern about regulations becomes whether they match (codify) the natural reaction of the public and the industry or whether they distort the natural reaction and cause new problems. In addition, sometimes other industries use similar methods or inputs for different purposes but must modify their behavior and cost structure to comply without any of the benefit.

As for the current financial crisis, the first cause is not yet determined despite the public media and politicians. Most mortgage defaults and foreclosures are limited to a few states, California, Florida, Arizona, and Nevada. Yet house price declines are a national problem even in areas of the US with below historical average defaults and foreclosures, such as the Northeast. Supposedly, we were in a housing bubble, yet the areas of the US with the greatest appreciation were the areas with the greatest increases in the number of new housing stock. Since when does economics allow for price increases when there is an increase in supply and more than enough to meet demand?

Similarly, studies of subprime mortgages (see St. Louis Fed) show that at the end of three years, eighty percent of these instruments cease to exist through refinancing, repayment, etc. Due to their high loan to value ratios, when house prices declined subprime defaults dramatically increased because the homeowner could not refinance the mortgage or repay the mortgage through a sale of the home. In other words, house price declines happened before the defaults happened and were in fact a cause of the increase in subprime defaults.

If defaults did not cause the decline in house prices, what did? What structural changes were occurring in the US economy to make homes worth less across the US and not just in areas of overbuilding and high mortgage defaults?

Bear Stearns went bankrupt about a year ago for liquidity reasons. It was unable to continue to post collateral to fund its revolving debt. The market value of Bear's mortgage collateral declined substantially in value. It no longer had sufficient collateral to continue its operations. The mystery is that on a cash flow basis at that time and currently, the collateral is worth much more than the market price. What other factors besides mortgage defaults and foreclosures depressed and continue to depress the price of mortgage securities?

[See my Oct 21, 2008 blog post, "Home Values Were Not In A Bubble."]

Until the underlying causes are determined, any regulatory response "fixing" the financial system has an excellent chance of missing the mark and causing significant future structural problems for the US economy.

Gross Domestic Product by State, 2nd Quarter 2023: US Bureau of Economic Analysis Map

 

From Bureau of Economic Analysis, "Gross Domestic Product by State, 2nd Quarter 2023 and Comprehensive Update:"

Real gross domestic product (GDP) increased in 44 states and the District of Columbia in the second quarter of 2023, with the percent change ranging from 8.7 percent in Wyoming to –1.9 percent in Vermont, according to statistics released today by the U.S. Bureau of Economic Analysis (BEA). 

Current-dollar GDP increased in 46 states and the District of Columbia in the second quarter, with the percent change ranging from 8.3 percent in Kansas to –4.3 percent in North Dakota.

Source: Bureau of Economic Analysis

US Supreme Court Never Decided A Legal Case About Falsely Shouting Fire In A Crowded Theater: Prohibited Speech Must Be Directed To And Likely To Incite Or Produce Imminent Lawless Action

 

From City Journal, "The “Shouting Fire” Pretext: A new book torches an old censorship canard." by Corbin K. Barthold:

“Fire in a crowded theater” does not come from a legal case involving fires or theaters. It comes, rather, from Schenck v. United States (1919), a case about a socialist arrested during World War I for peacefully protesting the military draft. The Supreme Court upheld his conviction. Along the way, Justice Oliver Wendell Holmes Jr. wrote that “the most stringent protection of free speech would not protect a man in falsely shouting fire in a theatre and causing a panic.” This imaginary situation was used to show that the First Amendment retreats before a “clear and present danger” of speech “bring[ing] about the substantive evils that Congress has a right to prevent.”

The Court later tightened this test substantially, ruling in Brandenburg v. Ohio (1969) that, to lose First Amendment protection, dangerous speech must both aim at producing, and be likely to produce, imminent lawless action. Yet the flimsy “fire in a crowded theater” metaphor lives on. As [Jeff] Kosseff observes, the line “is used as a placeholder justification for regulating any speech that someone believes is harmful or objectionable.” For the would-be censor, the concept is wonderfully plastic: almost any speech can stand in for the shout in the theater.

Is Preventing Asset Bubbles Worse For The Economy? Reprint Of My December 2009 Post

The following is a reprint of my blog post of December 14, 2009, "Is Preventing Asset Bubbles Worse For The Economy?"

Monday, December 14, 2009

Is Preventing Asset Bubbles Worse For The Economy?

Posted By Milton Recht

But would we have destroyed Amazon.com, Ebay and Google to name a few very successful internet companies in the process of controlling the internet bubble? Will the long term effect of a remedy for controlling asset bubbles, destroy future industries? Wasn't Holland's tulip industry the result of tulip bulb mania, a bubble?

How does government distinguish from innovation and asset bubbles? Innovation and new industry result in a rush of new investment, asset price increases, financial collapse of many participants, asset declines and survival of a few big winners that go on to create new opportunities and economic growth. Can we distinguish innovation from so-called bubbles, which have no positive economic and social welfare effect?

By preventing bubbles, we prevent major investment in new technologies, processes and industries. We will create a world with very little economic growth, a world without structural shifts in technologies, if our goal is to prevent new bubbles.

If we believe in increasing asset price bubbles and want to prevent them from occurring, shouldn't we also believe in decreasing asset price bubbles, where prices collapse too far and too fast and want to prevent price declines also? Isn't preventing bubbles really just an alternative way of saying we do not want major price changes? Wouldn't prevention of price movements substantially distort the world's economies and lead to worse results than any asset bubble?

Isn't it is better to figure out remedies for the occasional negative effects of bubbles than to try to prevent them from happening?

And of course, there is always a possibility that asset price bubbles and eventual collapse are a rational response to economic events at the time that we are too ill informed to understand correctly.

My comment to "Using a hammer or a wrench to pop asset price bubbles?" by Antonio Fatás posted on the Antonio Fatas and Ilian Mihov on the Global Economy blog.

Bank Leverage Is A Red Herring: Reprint of My 2009 Blog Post

The following is a reprint of my blog post of June 17, 2009, "Bank Leverage Is A Red Herring."

Wednesday, June 17, 2009

Bank Leverage Is A Red Herring

Posted By Milton Recht

Many offer higher capital and lower leverage requirements as a solution to the problem of the recent banking crisis. However, it is a risk preference problem and it is not a capital or leverage problem. As anyone familiar with financial theory knows, leverage can be placed anywhere in the investment chain to create a higher risk level. Higher leverage is just a way to increase risk and the potential return.

So, if capital is increased at the bank level (lower leverage and lower risk), banks will either invest in riskier products or make safer investment products riskier by incorporating leverage into the product directly or implicitly, such as through embedded options, etc.

Using residential mortgages as an example, their risk is increased by going from 80 percent loan to value to 100 percent loan to value. Additional risk is created by lending to lower credit worthy borrowers.

When the mortgages are packaged as investment products, borrowed funds can be used to increase the value of mortgages in the product so that the total mortgage value exceeds the equity investment in the product, which increases their riskiness. The investors in these leveraged products can borrow funds themselves to increase their equity investment in the leverage products, further increasing the risk to the investors.

The investor's risk preference ultimately determines the amount of risk in the invested products. There are too many ways to increase risk. Regulations and regulatory supervision will not stop excessive risk from occurring if that is what the bank or any other investor desires.

It is a rehash of the old Modigliani-Miller problem about the optimal capital structure. A bank with low leverage can invest in riskier products to achieve the same total institutional risk that higher leverage would achieve. Despite the regulators' attempt to prevent increased risk, an institution with a higher risk tolerance will find ways to invest in products that match its risk profile. The risk to the institution will not be lower with higher capital amounts.

As Arnold Kling stated, "the problem was not a gap in regulatory structure." What would cause financial institutions to take on so much risk that the continued existence of the entire institution was in jeopardy?

Moral hazard and incentive compensation themselves cannot explain the institutional behavior. Participants, many of whom had restricted company stock, risked too much of their own personal wealth, careers and reputations for the bonus compensation structure to be the answer. Furthermore, many of the investors, including the investment and commercial banks, are too sophisticated not to have understood the risk, despite the credit rating agencies' stamp of approval and their post mortem statements.

While there are many "expert" answers proffered, none offer an adequate explanation of why institutions took on so much risk. Many sophisticated investors and financial institutions either misread the risk in the market or intended to take on excessive risk. Both are troubling and not easily fixed.

Addendum

The recent 2023 Silicon Valley Bank, Signature Bank, and First Republic Bank failures show that the management of these banks was willing to take on the added risks of interest rate increases and volatility, asset sheet valuation losses, and deposit withdrawals. The bank asset-liability management systems and analyses would have revealed to banks' management the danger of the maturity mismatch and cash flow risks of the long-term US Treasury investments funded by short-term deposits that created the run of the banks' deposits.

Effects of US Federal Policies on Electric Vehicle Demand and the Supply of Charging: CBO Projections

From CBO, "Projecting the Effects of U.S. Federal Policies on Electric Vehicle Demand and the Supply of Charging Stations" Presentation by David H. Austin, an analyst in CBO’s Microeconomic Studies Division, at ICEX España Exportación e Inversiones, November 16, 2023:

Projecting the Effects of U.S. Federal Policies on Electric Vehicle Demand and the Supply of Charging Stations from Congressional Budget Office

Housing Inflation Is the Worst

From The Wall Street Journal, "While All Inflation Feels Bad, Housing Inflation Is the Worst: For some, unaffordable homes undercut the American dream even more than high gasoline and food prices" by Greg Ip:

Housing is an entirely different matter. The Bureau of Labor Statistics, which compiles the CPI, doesn’t measure the cost of homeownership with home prices. Rather, it estimates what a homeowner would pay to rent their own house. This “owners’ equivalent rent” tends to track rents rather than houses and is up 17% since the start of 2021.

But if you’re actually in the market, what matters is the price of a home and the mortgage rate. Since January 2021, home prices, despite a late 2022 dip, have risen 29%, according to the S&P/Case-Shiller national home price index, and mortgage rates have nearly tripled. The buyer of the typical home thus faces a monthly principal and interest payment of nearly $2,200, more than double the level of early 2021, the National Association of Realtors calculates. No wonder the net share of consumers telling the University of Michigan it is a good time to buy a home is the lowest since 1982. 

Source: Wall Street Journal

CBO’s Analysis of the 30-Year Long-Term US Budgetary Outlook

From CBO’s "Analysis of the Long-Term Budgetary Outlook," November 16, 2023, Presentation by Molly Dahl, CBO’s Long-Term Analysis Unit Chief, at the University of Michigan’s 71st Annual Economic Outlook Conference:

CBO’s Analysis of the Long-Term Budgetary Outlook from Congressional Budget Office

The Last Line of Defense By Bari Weiss: Barbara K Olson Memorial Lecture: Federalist Society: Video

"The Last Line of Defense" by Bari Weiss, from The Free Press, Barbara K. Olson Memorial Lecture at The Federalist Society, November 10, 2023:

Bari Weiss is the founder and editor of The Free Press and host of the podcast Honestly. From 2017 to 2020 Weiss was an opinion writer and editor at The New York Times. Before that, she was an op-ed and book review editor at The Wall Street Journal and a senior editor at Tablet Magazine.
[Source: Bari Weiss Bio]

US Population Will Stop Growing By 2080 And Shrink By 2100: Census Bureau Projections

From The Wall Street Journal, "America’s Population Projected to Shrink by 2100, Census Figures Show: Declining birthrates and higher death rates are making the U.S. more reliant on immigration for growth" by Paul Overberg and Rosie Ettenheim:

Census Bureau projections released Thursday show that, under the most likely scenario, the U.S. will stop growing by 2080 and shrink slightly by 2100.

It is the first time that the bureau has projected a population decline as part of its main outlook for the coming decades. The only time the U.S. has recorded a population decline was in 1918, when the flu pandemic and deployment abroad of more than one million troops produced a small drop in the estimated population.

Slowing growth would produce a peak U.S. population of almost 370 million before an ebb to 366 million in the final years of the century, according to the bureau.

Halloween Trick Or Treat Kids Created Wealth By Trading Candy

From THE BEACON, "How Do Your Kids Create Wealth by Trading Halloween Candy?" by Art Carden:

The kids were creating wealth even though they weren’t making any new candy. How? They were getting candy they preferred for candy they didn’t like as much.

My daughter, for example, mentioned that she doesn’t actually like candy with caramel in it (I was surprised to learn this). This means Snickers, Twix, Milky Ways, and a whole host of other delicious candies are out.

If trade isn’t an option, she’s simply stuck with a lot of candy she doesn’t want to eat. With access to a market consisting, in this case, of her brothers and friends, she is able to swap the caramel-containing candies she doesn’t want for non-caramel-containing candies she does. She is better off. Her trading partners are better off. There’s an important lesson here: by getting candy into the hands of those who value it most highly, the kids are creating wealth.

It’s a mistake to think that wealth consists of stuff. Wealth, rather, is whatever people value. For someone who likes Snickers bars, Snickers bars are wealth. For someone who doesn’t like Snickers bars, they aren’t wealth—unless they can be traded. If they can, the excess Snickers bars become wealth because they can then be swapped for something better.

CAFE Standards Comment: Reprint Of My Blog Post Of May 21, 2009, "Is A Combination Of Old And New Vehicles Better Than CAFE?"

The following post is a reprint of my blog post of May 21, 2009, "Is A Combination Of Old And New Vehicles Better Than CAFE?"

Thursday, May 21, 2009

Is A Combination Of Old And New Vehicles Better Than CAFE?

Posted By Milton Recht

President Obama proposed changes to CAFE standards that will increase the average mile per gallon of cars and trucks by 2016. The changes are expected to increase the price of a vehicle, on average, by $1300.

We will have a technological change and a price change, without a functional change. A car and truck will still be a people and goods transporter.

Analyses at this point, prior to actual vehicle prototypes, are assuming that carrying capacity in both weight and cubic feet will remain unchanged. However, this is speculative and carrying capacity may reduce per vehicle or on average. Vehicles are functionally used for business transport and multiple passenger transport.

It is too early to speculate on the physical vehicle changes and the effect they will have on number of cars/ truck needed in actual life situations. [EVs, such as] Prius and Insights are nice cars, but after a school sporting or social event, you need more of them to transport the kids home or to pizza, than if larger, less fuel-efficient 6-9 seat SUVs were used. Splitting a passenger to put into two cars is not a practical option. A similar logic applies to some cargo. Are there analyses of fuel use inputting real life situations to see what combination of old and new cars/trucks use the least fuel in actual, everyday usage? Since capacity is changing, it is not a price (or mpg) elasticity. [Oct 30, 2023 update: Additionally, increasing the number of passengers and carrying weight of an EV, decreases the distance and time until there is a need to recharge batteries, which will lead to range anxiety and an increase in the number of electric vehicles needed for each internal combustion vehicle. More EV vehicles manufactured and produced increase CO2 emissions before purchase.]

It is an optimization problem with real life inputs. Given the new vehicle and old vehicle characteristics, what quantity mix of the vehicles will minimize fuel use and CO2 emissions?

It could very well be that large, fuel inefficient cars/ trucks in the mix reduce total miles driven, fuel use, and CO2 emissions. It would mean not achieving the new CAFE standards, yet achieving all the end benefits. It is not difficult to imagine than in suburban and rural settings, large vehicles mean fewer vehicles per event, fewer total miles driven and less CO2 production. Does the benefit of higher mpg vehicles more than offset their possible increased usage in both miles and number of vehicles per event? Alternatively, are fuel use and CO2 emissions minimized with a combination of fuel-efficient and non-fuel efficient vehicles so that the combination does not meet CAFE standards?

CAFE standards are determined by car sales and not by actual vehicle usage. Cars that are 30 percent more efficient but get used twice as much, are less environmentally friendly than fuel inefficient cars.

Additionally, price increases per vehicle will make a used vehicle more attractive, in addition to less expensive new models. Moreover, dealers have more profit margin leeway to reduce used car prices to make their prices more attractive. Three times as many used cars and trucks as new ones are purchased each year. The total dollar valued of used vehicle purchases exceeds new ones and the average price of a used vehicle is about 30 percent of a new vehicle. Used vehicles are also more profitable per vehicle to dealers than new vehicles.
http://www.naaamap.com/NAAA/pdfs/The_Importance_of_UsedCars.pdf

In addition to buying cheaper models or used cars, a price increase could also shift families to do more car sharing and to own fewer vehicles per household. One fewer car may or may not reduce total miles driven by two cars in a household.

The goals of Obama's proposal are to reduce fuel consumption and CO2 emissions. However, the metric is CAFE standards and not actual fuel usage or emissions. CAFE is based on sales and not actual vehicle usage. It is not like a water meter. It is a proxy for the desirable results and as such can be achieved without actually producing the intended results at the lowest cost or with the most benefit. Inputs of real life usage of vehicles under different situations into an optimization model are needed to see what combinations of vehicles, old and new, efficient and inefficient, will produce the minimum fuel use and emissions.

Just using economics and engineering could produce results that meet CAFE, but do not achieve the intended objectives.

CBO Presentation On Health Care And The Federal Budget

From CBO, "Health Care and the Federal Budget" Presentation by Chapin White, CBO’s Director of Health Analysis, to the MITRE Health Advisory Council, October 19, 2023:

Health Care and the Federal Budget from Congressional Budget Office

Bank Capital Does Not Promote Best Banking Business Practices: Reprint of "Capital Is The Fool's Gold Of Banking"

Reprint of my March 4, 2010, blog post, "Capital Is The Fool's Gold Of Banking." My comments in this over a decade old post, written after the 2008 recession and financial crisis, is still relevant today to the supervison of the banking industry, the recent bank failures, and the over investment in long-term US Treasuries bonds.

 

Thursday, March 4, 2010

Capital Is The Fool's Gold Of Banking

Posted By Milton Recht

Is capital important for the health and safety of the banking industry? Was a shortage of capital the reason there was a financial crisis and would higher capital levels prevent another crisis? Wasn't liquidity the real cause of the recent banking problems?

One of the proposed solutions to prevent another banking industry crisis is to require banks to hold more capital. However, the banks that needed bailing out or failed in the recent crisis all satisfied the existing capital requirements. Capital is just a naive and confused patent medicine approach to a complex problem.

Bear Stearns and Lehman failed because they had a liquidity crunch and Citibank needed government help because it was experiencing a run on the bank, a liquidity shortfall.

Capital is a balance sheet approach to bank supervision and control. It is a regulatory concept computed by a regulatory formula. It does not represent the residual liquidation value of the bank after its debts are paid. It does not represent the bank's net worth, the accounting or market value of the bank's assets less its liabilities. It does not represent the future earnings capacity of the financial institution. It does not measure the liquidity health of a financial institution.

Regulators establish guidelines for bank capital levels and monitor the capital levels of banks. Governments, and their agencies, such as the banking industry regulators, cannot act arbitrarily. Capital levels are the way that the government banking regulators justify their actions. When capital levels are threatened or below regulatory requirements, federal banking supervisors act to preserve deposits, and the deposit insurance fund. They close banks, merge unhealthy banks with healthy banks, or put banks under protective orders with restrictive requirements. They act with a consistent, predefined purpose and as such are not easily subject to judicial review to overturn the regulators' actions and interventions. Capital levels are just trigger points that allow the government to act in a consistent manner.

Suggested proposals to prevent another crisis are mere refinements to the current capital requirements. The arguments for change are that the risk adjustments were inadequate, incentives were wrong; the levels were too low, or inconsistent, etc. However, any set of capital rules will not cover all situations, will create a new set of economic incentives and will always be too low for some catastrophe, just as a dike cannot restrain all levels of water.

Often a banking crisis is a liquidity crisis. Customers notice bank problems when banks are having a liquidity problem, a run on a bank, because the bank does not have the funds to pay depositors' withdrawals or the funds to make loans.

Regulators like high capital amounts because it allows them to delay classifying a bank as a troubled bank and delay government intervention. It does not guarantee an improvement in the deposit insurance fund or a positive net worth at a bank. It does not measure or help a bank's liquidity needs.

Capital does nothing to prevent liquidity problems at banks. When a bank is experiencing a shortfall of funds, the institution must borrow funds to pay depositors, and fund new loans and meet daily cash needs. To borrow funds, a bank must often put up collateral, assets it has on its books. Usually, the liquidity lender to a bank wants the collateral amount, in market value, to exceed the amount of funds lent. Bear Stearns failed because as it needed more liquidity, the value of its collateral was decreasing due to the declining value of real estate and the increasing default rates on mortgage loans. Some of its mortgage backed securities it was using as collateral declined in value by as much as 70 percent. Eventually, Bear ran out of collateral and could not fund its daily operational needs.

Capital is nice to talk about because the regulators find it easy to measure, not subject to dispute or interpretation under the regulations and consistently applied to all banks. It is easy to explain when a bank is above or below required capital levels and requires government involvement.

Liquidity is a much more difficult concept to use because the liquidity needs of each bank are different and can vary within an individual bank over a short time. It is more difficult to monitor, more difficult for the public to see when a bank is short of funds and more difficult to explain to politicians and the general press. Furthermore, publicly disclosing a liquidity shortfall at one bank can create a panic and run on another bank. Using liquidity as a guideline for bank troubles can cause a broader financial problem and make it much more difficult for regulators to contain a problem to a sole bank.

The contagion in the recent crisis was, in effect, a run on the banks. Everyone feared that the financial institutions were running out of liquid assets and that the collateral was declining in value in excess of the liquidity needs of the institutions. There was a wide spread fear that the banks did not have enough cash for their daily operational needs.

Capital is easy to understand and for regulators to measure. It is a convenient and acceptable trigger for regulatory intervention. Capital, however, does little to minimize future banking problems. It does nothing to promote the best practices for preventing future banking crises. Capital does not promote good banking, which must include asset diversification, sound business strategies and decisions, quality management, expense control and strong, sustainable earnings.

Reform, instead of focusing on capital levels, should instead focus on promoting sound banking practices as previously mentioned. Best business practices are the best way to prevent another crisis. Raising capital requirements by itself does not promote best practices. It just makes the regulators feels happy and allows them to offer patent medicine to those in search of a tonic.

Capital is a fool's gold that has little value, if any, in a severe financial crisis. The real gold is asset diversification, sound business strategies and decisions, quality management, expense control and strong, sustainable earnings.

“Social Justice Fallacies”: Thomas Sowell Interview Of His Latest Book

Thomas Sowell on his latest book, “Social Justice Fallacies.” Interview by Peter Robinson:

:

Student Loan Payments Surge To Pre-Pandemic Level

From Bloomberg, "Student Loan Borrowers Paid Off Billions Before Interest Restart: Payments to the Department of Education surged to pre-pandemic levels in August, according to a new report from economists at Goldman Sachs." by Claire Ballentine and Alexandre Tanzi:

The US Department of Education saw a surge in [Student Loan] payments last month as borrowers with savings started wiping out their balances, according to a new report by Goldman Sachs. After a three-year pause, interest began accruing again on federal student loans Friday, and borrowers need to start making payments in October.

For years, borrowers held out hope that forgiveness plans from President Joe Biden would help alleviate their debt burden. But after the Supreme Court struck down the president’s program to eliminate up to $20,000 per borrower, many decided they aren’t willing to wait around while racking up more interest. About $6.4 billion was transferred from the Department of Education to the US Treasury in August, the most in any month since February 2020, according to government data.

Source: Bloomberg

 

What Do We Get For Our Taxes: Our Diminished Return On Investment For Our Taxes: Reprint Of June 21, 2011, Blog Post

Below is a reprint of my June 21, 2011, blog post, "Our Diminished Return On Investment For Our Taxes:"

Tuesday, June 21, 2011

Our Diminished Return On Investment For Our Taxes

Posted By Milton Recht

In The New York Times Blog, Enonomix, "Are Taxes High or Low? A Further Look" Bruce Bartlett writes:

Nevertheless, it is clear that federal taxes have not been rising and are, at least in historical terms, lower for most taxpayers than they have been since the 1960s. Those who assert that taxes are rising or are at confiscatory levels simply do not know what they are talking about.

I find it startling that economists and the media in their discussions about tax rates fail to consider and discuss what the tax paying public gets in return for its payments to and investments in government and whether the return on our taxes has decreased, increased or remain the same over the years.

In the years after WWII, our taxes invested in a strong and well-equipped armed forces for our perceived protection against a WWIII. American's taxes built an interstate highway system and supported scientific research, including manned and unmanned space satellites and a man on the moon. Taxes funded the GI Bill for veteran's college education and business start-ups. Additionally, our money funded college and technical school loans and scholarships for anyone who enrolled.

The government used our money to attempt to eradicate poverty, child malnutrition, to provide free and affordable healthcare for the poor, for children and for seniors, and to provide a quality k-12 education for all children.

Tax paying Americans saw their taxes as investments in America's future and prosperity.

What Do We Get For Our Taxes Now

We have a military that is in distant parts of the world with unclear objectives and unclear links to America's safety. We have an armed forces that we fund that is doing the work that Europeans and others should be doing and paying for themselves.

Our government run k-12 school system is atrocious, expensive and unaccountable to anyone.

Government healthcare costs have exploded to the point where the continue viability of Medicare and other government health programs are uncertain. Uncontrolled, above inflation rates, cost increases are one of the major reasons.

The US infrastructure, its roads, tunnels and bridges, are rapidly deteriorating, and major new projects are just dreams on drawing boards and in politicians' speeches.

For a while in the 1950s and the decades after, American's perceived and were promised a decent return for their money paid into government through taxes and fees.

Today, more people probably see government spending and its necessary taxes as incapable of providing a positive and fair investment value to the country. People see how government education has failed, how government reimbursed health care costs have spiraled out of control. Most people would say education and other government services are inferior today than they were decades ago.

Need A Benchmark Of The Value Of Government Benefits And Services.

To have a sensible discussion about tax rates and tax levels, we need a measure of the value of the return the public gets for its tax dollars.

If I spent $2 in inflation adjusted dollars for a pint, 16 ounces, of ice cream 20 years ago, and today, I spend the same amount, $2 in inflation adjusted dollars, but get 12 ounces instead of the previous 16 ounces, is it useful to look only at what I spent? Don't we have to also consider what I get back for my money? The same is true for taxes. Looking at only the amount of tax, rates or revenue, without considering what the country and its residents get for that money is an incomplete and thoroughly misleading analysis.

Until there is a measure of the value of government services, benefits, and spending to use to judge the value and benefit of taxes, discussions about tax rates are incomplete.

If part of the public perceives it will get back benefits of lower value than it used to from government tax dollars, that part of the public will be against tax increases. Likewise, if part of the public sees value to government spending, that part of the public will favor more taxes.

It would be extremely helpful for discussions about tax rates to have some objective measure of the value of the return that US residents get for their tax dollars.

Get Them Or Let Them Attitudes: Prosecutorial Discretion Is A Huge Unregulated Threat To Civil Liberties: Reprint Of My 2013 Blog Post

Reprint of my Tuesday, January 22, 2013, blog post, "Prosecutorial Discretion Is A Huge Unregulated Threat To Civil Liberties: The Lesson Of Aaron Swartz And David Gregory." 

Tuesday, January 22, 2013

Prosecutorial Discretion Is A Huge Unregulated Threat To Civil Liberties: The Lesson Of Aaron Swartz And David Gregory

Posted By Milton Recht

Posted by Milton Recht:

From the academic paper, "Ham Sandwich Nation: Due Process When Everything Is A Crime" by Glenn Harlan Reynolds, Beauchamp Brogan Distinguished Professor of Law, University of Tennessee. J.D. Yale Law School:

Attorney General (and later Supreme Court Justice) Robert Jackson once commented: "If the prosecutor is obliged to choose his cases, it follows he can choose his defendants." The result is "The most dangerous power of the prosecutor: that he will pick people he thinks he should get, rather than pick cases that need to be prosecuted." Prosecutors could easily fall prey to the temptation of "picking the man, and then searching the law books . . . to pin some offense on him." In short, prosecutors’ discretion to charge – or not to charge – individuals with crimes is a tremendous power, amplified by the huge number of laws on the books.

Two recent events have brought more attention to this problem. One involves the decision not to charge NBC anchor David Gregory with weapons--‐ law violations bearing a potential year--‐long sentence for brandishing a 30--‐ round magazine (illegal in D.C.), despite the prosecutor's statement that the on--‐air violation was clear; the other involves prosecutors' rather enthusiastic efforts to prosecute Reddit founder Aaron Swartz for downloading academic journal articles from a closed database, prosecutorial efforts so enthusiastic that Swartz committed suicide in the face of a potential 50--‐year sentence.

Both cases have aroused criticism, and in Swartz's case even legislation designed to ensure that violating websites’ terms cannot be prosecuted as a crime. But the problem is much broader. Given the vast web of legislation and regulation that exists today, virtually any American is at risk of prosecution should a prosecutor decide that they are, in Jackson’s words, a person "he should get."***With so many more federal laws and regulations than were present in Jackson's day, the task for prosecutors of first choosing the man – or woman – and then pinning the crime on him or her has become much easier. This problem has been discussed at length in Gene Healy's Go Directly To Jail: The Criminalization of Almost Everything, and Harvey Silverglate's Three Felonies A Day. The upshot of both is that the proliferation of federal criminal statutes and regulations has reached the point that virtually every citizen, knowingly or not (usually not) is potentially at risk for prosecution. That is undoubtedly true, and the consequences are drastic and troubling. [Emphasis added, Footnotes omitted.]

Risk Based Capital Standards Are "A Well Intended Illusion": Reprint Of My 2013 Blog Post Of A Speech By Then FDIC Vice Chairman Thomas M Hoenig

Reprint of my decade old blog post, FDIC Vice Chairman Calls Basel Risk Based Capital Standards "A Well Intended Illusion" That Creates Undercapitalized Banks: Prefers Simpler Equity To Assets Measure:

 

Tuesday, April 9, 2013

FDIC Vice Chairman Calls Basel Risk Based Capital Standards "A Well Intended Illusion" That Creates Undercapitalized Banks: Prefers Simpler Equity To Assets Measure

Posted By Milton Recht

Posted by Milton Recht:

From "Basel III Capital: A Well-Intended Illusion" by Thomas M. Hoenig, Vice Chairman, Federal Deposit Insurance Corporation, to the International Association of Deposit Insurers 2013 Research Conference, Basel, Switzerland, April 9, 2013:

Aristotle is credited with being the first philosopher to systematically study logical fallacies, which he defined as arguments that appear valid but, in fact, are not. I call them well-intended illusions.

One such illusion of precision is the Basel capital standards in which world supervisory authorities rely principally on a Tier 1 capital ratio to judge the adequacy of bank capital and balance sheet strength.***In contrast, supervisors and financial firms can choose to rely on the tangible leverage ratio to judge the overall adequacy of capital for the enterprise. This ratio compares equity capital to total assets, deducting goodwill, other intangibles, and deferred tax assets from both equity and total assets. In addition to including only loss-absorbing capital, it also makes no attempt to predict or assign relative risk weights among asset classes.***An inherent problem with a risk-weighted capital standard is that the weights reflect past events, are static, and mostly ignore the market's collective daily judgment about the relative risk of assets. It also introduces the element of political and special interests into the process, which affects the assignment of risk weights to the different asset classes. The result is often to artificially favor one group of assets over another, thereby redirecting investments and encouraging over-investment in the favored assets. The effect of this managed process is to increase leverage, raise the overall risk profile of these institutions, and increase the vulnerability of individual companies, the industry, and the economy.

It is no coincidence, for example, that after a Basel standard assigned only a 7 percent risk weight on triple A, collateralized debt obligations and similar low risk weights on assets within a firm's trading book, resources shifted to these activities. Over time, financial groups dramatically leveraged these assets onto their balance sheets even as the risks to that asset class increased exponentially. Similarly, assigning zero weights to sovereign debt encouraged banking firms to invest more heavily in these assets, simultaneously discounting the real risk they presented and playing an important role in increasing it. In placing a lower risk weight on select assets, less capital was allocated to fund them and to absorb unexpected loss for these banks, undermining their solvency.***Despite all of the advancements made over the years in risk measurement and modeling, it is impossible to predict the future or to reliably anticipate how and to what degree risks will change. Capital standards should serve to cushion against the unexpected, not to divine eventualities. All of the Basel capital accords, including the proposed Basel III, look backward and then attempt to assign risk weights into the future. It doesn't work.

In contrast, the tangible leverage ratio provides a simpler, more direct insight into the amount of loss-absorbing capital that is available to a firm. A leverage ratio as I’ve defined it explicitly excludes intangible items that cannot absorb losses in a crisis. Also, using IFRS [International Financial Reporting Standards] accounting rules, off-balance sheet derivatives are brought onto the balance sheet, providing further insight into a firm's leverage. Thus, the tangible leverage ratio is simpler to compute and more easily understood by bank managers, directors, and the public. Importantly also, it is more likely to be consistently enforced by bank supervisors.

The entire speech is available on the FDIC archive collection site.

Multi-Family Housing Units Under Construction Ties 1973 Record Numbers

From Calculated Risk, "June Housing Starts: Record Number of Multi-Family Housing Units Under Construction" by Bill McBride, Wednesday, July 19, 2023:

Currently there are 994 thousand multi-family units under construction. This ties the record set in July 1973 of multi-family units being built for the baby-boom generation. For multi-family, construction delays are a significant factor. The completion of these units should help with rent pressure.

Source: Calculated Risk

Understanding Productivity Growth: 10 Year Economic Forecast: CBO Slide Presentation

From CBO, "CBO’s Economic Forecast: Understanding Productivity Growth" by Aaron Betz, an analyst in CBO’s Macroeconomic Analysis Division, at the NABE Foundation’s 20th Annual Economic Measurement Seminar, Presentation, July 18, 2023:

CBO’s Economic Forecast: Understanding Productivity Growth from Congressional Budget Office

More Money Will Not Solve Our Inadequate Education Outcome Problem: Reprint Of 2011 Post

Reprint of my blog post, "Need To Stop Kidding Ourselves That A Poor Education Outcome In The US Is A Money Problem" from 12 years ago:

Wednesday, January 19, 2011

Need To Stop Kidding Ourselves That A Poor Education Outcome In The US Is A Money Problem

Posted By Milton Recht

A comment I post on Capital Gains and Games blog, "The Problems of Local Governments -- In One Not So Easy Lesson" by Andrew Samwick:

"So calls for students to go to schools in their own neighborhoods really do put kids from minority, low-income households into schools with less opportunity."

My impression is that the issue is not so clear-cut. When you compare schools that have a mix of low income kids and high income kids with schools that are predominately high income, the predominately high income schools look better than the mix income schools on school wide statistics; higher average reading and math scores, higher percentage graduation rates, higher enrollment in colleges and higher enrollment in elite four year colleges. When the high-income group in the mix income school is compared by itself with the kids in the high-income schools, the results are equal.

Higher household income students do well independently of the school they attend. That is not to say they received identical educations. Certainly, schools in richer areas have more resources, smaller class size, more advance courses, etc., but reading and math scores and college enrollment are more predictable from parent's income and parent's education levels than they are from the amount of money spent per student in a school district, class size, age of the buildings, number of advanced classes, etc.

Schools in lower income areas often have minority kids but there are poor areas, such as Appalachia, and other parts of the US, where the kids are poor and not minorities. In low income areas, the structural aspect of schools, the buildings, the labs, the fields, etc, are in much poorer condition than in richer areas, but it is not clear any of that affects graduation rates or reading and math scores.

Years ago, it was noticed that despite extreme poverty in Appalachia, there were kids that went on to college. It was found that the most significant determinate was household expectation. Parents' expectations that their kids would graduate from high school and go to college were the important factors that determine which kids went on to college.

High-income parents expect their kids to go to good colleges. Kids accepted to charter schools or special magnet schools are expected by their parents to take advantage of that extra benefit and graduate and go to college.

A large percentage of Asian kids (and Asians are a minority in the US) go to college because their parents expect it.

Are there any studies that control for parents' expectations that show that a better school improves outcomes, controlling for the fact that any lower income parents who move or get their children into better schools are parents with higher educational expectations for their children? Parents who whose kids are rejected from enrollment into some 'special' better school (charter, magnet, etc.) due to some lottery or other mechanism will lower their expectations because their kids will continue to go to an 'inferior' school with worse education outcomes.

One of the big educational mistakes of the last few decades is the switch to the school centric, as opposed to the household centric, model for improvement of educational outcomes. The school centric model showed us that no matter how much money you throw at it, no matter what variables within the school you improve, such as teacher qualifications, class size, technology, etc., student education outcomes do not change. The average US reading and math scores on standardized tests has not improved in 40 years, despite more money, better teachers and smaller class size.

The extra money, in excess of inflation and student population growth, spent on education over the last few decades has not provided a positive return on the investment. We need to stop kidding ourselves that a poor education outcome in the US is a money problem.

State GDP And Personal Income Maps: Percent Change 1st Quarter 2023

From Bureau of Economic Analysis, "Gross Domestic Product by State and Personal Income by State, 1st Quarter 2023"

Real gross domestic product (GDP) increased in all 50 states and the District of Columbia in the first quarter of 2023, with the percent change ranging from 12.4 percent in North Dakota to 0.1 percent in Rhode Island and Alabama, according to statistics released today by the U.S. Bureau of Economic Analysis (BEA).***Personal income, in current dollars, increased in 48 states and the District of Columbia in the first quarter of 2023, with the percent change ranging from 11.4 percent in Maine to –1.0 percent in Indiana.

Source: Bureau of Economic Analysis

  *** Personal income In the first quarter of 2023, as current-dollar personal income for the nation grew at an annual rate of 5.1 percent, state personal income increased in 48 states and the District of Columbia.
 

Source: Bureau of Economic Analysis

Did State Colleges Exacerbate The High Cost Of College? Reprint With Addendum

Reprint of my 12-year-old blog post, "Why College Is Expensive" about the price of college.

Saturday, February 19, 2011

Why College Is Expensive

Posted By Milton Recht

A comment I posted on "Why does college cost so much?" by Tyler Cowen:

Colleges and universities do lower their costs of teaching. They use low cost adjuncts, grad students and post docs. They increase class sizes, use large lecture halls and eliminate courses with low enrollments. Schools look for ways to save on heating, cooling and other and energy costs. There is no shortage of competition for students at US colleges as at each beginning term there are many unfilled seats at many of the colleges and universities in the US. A greater part of tuition has gone to non-teaching parts of universities, e.g. administrative, fund raising, sports, buildings, dorms, stadiums, and other physical structures, etc.

Obviously many schools have pricing power and can and have raised their prices without seeing ill effects in applications.

It has been like this for decades.

A more logical reason for pricing power at private universities is the existence of state schools.

State colleges took away from private colleges, the most price sensitive element of college students and parents, lower income and middle class students. Private universities became a luxury good and a sign of affordability for the rich. While private colleges these days do provide financial aid, most colleges do so for only about half or less of their students for less than half the tuition and room and board costs.

Without state colleges there would have been greater pricing and political pressure on private colleges to make schools affordable for the middle and lower income group. Colleges would have be been more frugal with their spending to keep costs and financial aid low so more middle class and lower incomes students could attend.

Basically, state colleges allowed private colleges to become luxury [and Veblen] goods for price insensitive [and staus seeking] consumers, which allowed private schools to raise prices without much concern.

Addendum to the original blog post.

Private colleges did not have to significantly expand their student enrollment to meet the demand of increased applications for private college admission. As states created state colleges or expanded their enrolled number of college students, the state schools admitted the students who were not accepted at private colleges, or could not afford the expense of private schools.

State colleges eased the political and pricing pressure on private colleges to expand the size of the admitted student body; to lower tuition and other college expenses; to increase financial aid. State schools could raise their tuition as long as they remained more affordable than private college.

Record Renewables Growth In 2022 Did Nothing To Lower Fossil Fuels Dominance At 82% Of Supply

From Reuters, "Renewables growth did not dent fossil fuel dominance in 2022, report says" by Shadia Nasralla; editing by Philippa Fletcher:

Global energy demand rose 1% last year and record renewables growth did nothing to shift the dominance of fossil fuels, which still accounted for 82% of supply, the industry's Statistical Review of World Energy report said on Monday [Weblink added]. *** The stubborn lead of oil, gas and coal products in covering most energy demand cemented itself in 2022 despite the largest ever increase in renewables capacity at a combined 266 gigawatts, with solar leading wind power growth, the report said.

"Despite further strong growth in wind and solar in the power sector, overall global energy-related greenhouse gas emissions increased again," said the president of the UK-based global industry body Energy Institute, Juliet Davenport.

Inflation Adjusted 10.5% Drop In 2022 Charitable Giving

From Wall Street Journal, Opinion, Commentary, "A Tax Deduction Won’t Save U.S. Charities: Adjusted for inflation, donations fell 10.5% last year from 2021." By Leslie Lenkowsky:

High inflation is hitting America’s charities. Donations last year dropped by 3.4% from 2021 levels, or 10.5% after adjusting for inflation, according to the Giving USA report released this week. Never in its more than 60-year history has this annual report recorded so steep a single-year decline in real dollars.***According to Giving USA’s inflation-adjusted estimates, all three main sources of philanthropy—corporations, individuals and foundations—cut back last year. At 6.4%, the decline in individual giving measured in nominal dollars approached that of the Great Recession, when philanthropy plummeted. Factoring in 2022’s inflation more than doubled the drop.

All kinds of charities saw giving slide. Inflation-adjusted declines for education and “public-society benefit” organizations (such as political advocacy, community development and policy research groups) exceeded the national drop, while giving to the arts, environment and human services almost matched it. Donors kept supporting religion and healthcare at close to 2021 levels.

US States (+DC) Homelessness Rates Per 10,000 People

From USA Facts, "Which states have the highest and lowest rates of homelessness? California, Vermont, and Oregon have the highest rates of homelessness across the 50 states." Published on Thu, March 16, 2023 5:00AM PDT | Updated Tue, May 16, 2023 4:53PM PDT:

Source: USA Facts

US Needs To Evaluate The Effectiveness OF Legislation

Reprint of my December 2, 2014, blog post, "Replace The Congressional Budget Office With A Legislation Effectiveness Office" that will evaluate the effectiveness of existing legislation.

Tuesday, December 2, 2014

Replace The Congressional Budget Office With A Legislation Effectiveness Office

Posted By Milton Recht

My published comment to The Wall Street Journal Opinion, "How to Score in Congress: The GOP needs reformers to run CBO and the Joint Tax Committee:"

In the private sector, costs and revenue are associated with the same service or product. In the public sector, costs are incurred for a benefit, but the revenue is from unrelated taxes and fees.

Evaluate government programs by their effectiveness in achieving their purpose and not by the amount of taxes and fees that Congress includes in the same bill. Congress can enact the taxes and fees associated with many bills without the passage of the original program bill. The new funds could be used to lower our debt or balance our budget.

Instead of a Congressional Budget Office, the US needs an Effectiveness Office to analyze the likelihood that a proposed law or program will achieve its purposes; to study the effectiveness of previously enacted legislation in achieving stated goals.

Having ineffective programs and laws removed would do more good, then balancing the books of new programs and laws with more fees and taxes. Reorganize the CBO as a Program Effectiveness Office.