28 August 2011

Bubbles, Bubbles, Bubbles

This graph from The Atlantic's Daniel Indiviglio is pretty astounding (click to enlarge).


A good deal has already been written about it. Particularly the fact that the growth in student debt exceeded the growth in other debt during what is now know to have been a massive housing bubble. I don't want to double up on too much of what others have written, but I had some thoughts.

The graph (and the article) (and current students) make a compelling case that we are in a student loan bubble. So, it might be sensible given the obviously high cost of the previous bubble to begin to at least draw down the growth in student debt. This likely means some combination of (a) reducing government support for student loans (removing guarantees, tightening lending standards, etc.), (b) providing grants to students, (c) instituting some sort of price controls on universities (tuition caps). All three of these measures are politically difficult:

Reducing Loan Support: Much of the increase in the cost of higher education and student debt can likely be attributed to government programs that allow students (especially grad student and undergrads' parents) to take out virtually unlimited loans. Removing support for this type of lending would decrease student's ability to pay high tuition. Hopefully, universities would have to respond by lowering fees. However, this has distributional consequences, especially in the short-term. Middle and lower income students will effectively be locked out of many universities. This will clearly be politically unpopular since university has become one of the few ways to try to ensure a stable and moderately high income.

Providing Grants: Given most state and federal budget realities, changing loans to grants would effectively be changing student debt to public debt. There is clearly little appetite for this right now.

However, it should be noted that if the student bubble bursts, like the housing bubble, explicit or implicit contingent liabilities have a way of hitting the budget directly anyways.

Tuition Caps: There are numerous political problems. Imagine any US politician these days advocating price controls. Furthermore, there would be difficulties getting universities to go along with such measures since they are the direct beneficiaries of tuition inflation.

(For my UK readers, the current government used a couple of these strategies when they raised university fees. Though we can discuss what you think about higher tuition fees in the UK, it is clear that the growth in UK student debt isn't going to grow at the same continuously massive rate as in the US.)

I'm not sure how this is going to turn out, but I do have one further thought as a budding academic. Though universities (including faculty) clearly benefit from a system that is rapidly allocating considerable resources to it, they have a long-term interest in taming this bubble. The clear analogy is the housing industry.

Sure when the bubble is building things are great. But when it crashes and crashes in such a way that demand sinks for a long time, the former winners become losers.



23 August 2011

Rebuilding Haiti?

After some weeks of teaching a summer course at Peking University, I'm back at the blog. (For the curious, virtually all Google-hosted sites are blocked in China, including this one.)

I had intended to start off the new series of posts with something on European bank guarantees, perhaps inspired by this FT editorial. However, before getting to that I just wanted to point your attention to Janet Reitman's Rolling Stone article on reconstruction, or the lack thereof in Haiti.

(Coincidentally, this is the second Rolling Stone article this week suggested by longform.org that I've liked. The other was Matt Taibbi's piece on how the SEC disposes evidence from preliminary investigations. I would blog about that article too but I think I need to just sit down and write the "credibly committing to bad information" paper that I've already mentioned.)

I actually don't have too much to add to the discussion, especially considering Felix Salmon's nice post on the article.

I do want to register my complete astonishment that the Hati rebuilding effort seems to have been plagued by so many errors that are commonly mentioned in basic undergraduate courses on overseas development (I'm thinking of you Rex Brynen):
  • High proportions of aid being spent on external NGO overhead.

  • Lack of NGO/External Government/Domestic Government/Citizenry coordination.

  • Disproportionate focus on donor, rather than recipient needs.

My favourite anecdote for sheer ridiculousness concerns toilets and US building codes. USAID officials turned down a proposal to build composting toilets in new housing because they didn't comply with US building codes. This was despite the fact that the area did not have the sanitation capacity to handle US style toilets. Of course, when you spend more money on flush toilets you build fewer houses.

I understand that managing development aid well is very difficult, especially in countries that have just had massive natural disasters. However, the problems listed in Janet Reitman's article read like a parody of a 1980s development project. My question:

Why is there such a large disconnect between the lessons learned in the academic literature and how development aid is actually implemented?