Education: States Fail to Raise Bar

Article: Wall Street Journal, States Fail to Raise Bar in Reading, Math Tests, Stephanie Banchero

A page 2 article in today's WSJ mentions a troubling report published yesterday by the National Center for Education Statistics.

According to the report (which admittedly is based on 2009 data), 35 states have passing grades on their standardized reading and math exams which are below the "basic" level on the national NAEP exam, including my home state of New York.

from www.wsj.com

I am no expert on this topic, but it seems to point to a dumbing down of standards in most of the fifty states, at a time when many developed countries, and some emerging ones, have more literate and numerate populations than we do.   Joanne Weiss, chief of staff to Secretary of Education Duncan said it showed that "low expectations are the norm" in too many states.

This may be the most important issue for the long term health of our nation.  Are we arrogant enough to think that we can pay off 14 trillion in debt, build health care and retirement systems that can handle the growing demographic overhang without bankrupting us, and reverse global warming, and do it all without the help of the upcoming generations?

Education is a big complicated issue.  I have heard that part of the solution may be finding the "secret sauce" that certain teachers have that allows them to reach students and motivate them to learn.  Apparently the Gates foundation has been funding such "R&D" efforts.  But can this secret sauce really be identified and applied?  Or is it the result of commitment, experience and hard work, like any other professional expertise?

Conservatives say that more school choice through voucher programs and the like is the answer.  It is tempting to think that freeing up individual families to vote with their feet will lead the magic hand of the market to throw up educational solutions that work.  But I wonder: of the 13 OECD countries who outscored us in reading,and the 24 who outscored us in math, how many had free-market voucher programs?  Any?  Wouldn't a good starting point be to look at other countries, see what actually works, and try going with that?

My opinion, for what it's worth, is that to turn around our public education system we must attract the best and the brightest to teaching.  This may have been what happened generations ago, when many exceptional women went into teaching for lack of better choices.  Now, with a wide open labor market, I fear few of the best people want to dedicate their lives to public school teaching.  Sure, low salaries may be part of the problem, but salaries for university professors are also low, and somehow this doesn't deter extremely bright people from going into academia.  People from all over the world come to the USA to attend our universities, and young, talented academics are willing to accept a sub-standard living standard to teach in them.  Why should public primary schools be so different?

One friend with teaching experience told me that the problem with teaching as a career is not the salaries, but the manner in which we educate our teachers.  According to her, teaching colleges focus very little on the subject matter being taught, in favor of a focus on softer theories of education.  This psychological / sociological focus suits many of the budding teachers --who were not all that passionate or knowledgeable about literature, math, or science to begin with-- but does not serve the children well.  If we want to create a more rigorous, hard-core education system, do we need to start with our teaching colleges?

Profits Are Up, What About Jobs?

This WSJ article by David Wessel gives an interesting analysis of why we have not seen job growth commensurate with the recent growth in corporate profits.

Courtesy of Wall Street Journal

Yes, unemployment is a complex and multi-layered issue, with a mixture of  long-term structural factors and short-term economic factors.  As labor productivity goes up, businesses can use fewer staff to generate a profit; labor is less mobile than it used to be because many people are stuck in homes with underwater mortgages and cannot move; the housing market (and therefore construction) is stuck in a medium-long term rut; our educational system does not produce workers with the high-tech skills that many businesses need (also in today's WSJ: U.S. Business Leaders Press Senate Panel for More Work Visas); executives are uncertain about the effects of Obama-care, Dodd-Frank,  etc, etc.

However, I wonder how much this might have to do with incentives that are out of wack.  Corporations focus on setting up a proper compensation system so that senior executives' incentives are aligned with shareholder's incentives --basically CEOs and other fat cats are paid very little in wages and receive most of their compensation in stock or options.  Executives make more when profits go up.  But regular employees simply receive a wage, and executives have every incentive to reduce costs (i.e., other people's salaries) as much as possible.

My first question which has nagged at me as I studied corporate governance: why the big difference between senior executives and other employees?  In the end, aren't they all supposed to make an important contribution?  As a customer, if I go into a Starbucks, the performance of the guy making the coffee is much more important to me than the performance of the CFO--why does the corporate governance structure make a qualitative distinction between the two?  Why are a few people given the privilege of having their compensation "aligned with the shareholders' interests" --which means they may have earnings measured in the millions-- while others have earnings measured in the tens of thousands, and can get canned at the drop of a hat, by some brilliant new cost-cutting executive?

Executives have a big incentive to cut costs and get rich in the process.  But isn't there some benefit to having long-term stable, loyal employees, to treating employees as valued partners, not to mention the "Corporate Social Responsibility" that many corporations preach in their annual reports?  Perhaps so, but my sense is that these are factors that will generate benefits over the long term--years and decades-- and require patience and skill to capitalize on.  Cutting heads, if it can be done without driving customers away in the short term, generates a quick jump in the bottom line.  Traditionally, another big disincentive to laying  people off wholesale were the unions, which have all but disappeared in the private sector.  No, I do not advocate a system like Spain's, where unions made it nearly impossible to fire under-performing employees, thus leading to an 10% structural unemployment rate (now around 20% due to the bursting of their real estate bubble).  But look at the growing discrepancy in pay between executives and line employees in the US, look at the gap between rich and poor, look at corporate profits, and look at the unemployment rate.  And then maybe take a look at the tax structure.

Executives who get paid mostly in stock or options make most of their income from capital gains, which are taxed at 15%.  Other employees get salaries, which are taxed based on a sliding scale, with a maximum rate of 35% (25% for incomes between $34,500 and $83,600).  This is the U.S. government doing its part to make employee wages even more expensive for corporations, relative to what they pay executives, therefore increasing the incentive to use salaried employees as little as possible.   Is this really what we want to be doing?

Why can't we have a fair, simple tax structure which values work as well as deal-making?  And why can't we have an informed, well-educated work force?  Is this too much to ask?

What About Japan?

Article: The Economist, Japan's Debt: The Domino that Never Falls

Courtesy Japan National Tourist Organization

One of the reasons that I love The Economist is that it does not ignore the world's third largest economy.  There is always one article, and often two or three on Japan each week, even when the country is not being devastated by earthquakes and tsunamis.  Last year, China passed Japan as the second largest economy in the world, but China has a population that is ten times Japan's, and all manner of natural resources.

From a 2007 BBC News Article

Japan, despite myriad problems --natural disasters, the largest government debt in the world (225% of GDP, compared with Greece's 144% and USA's 100%), few natural resources, a shrinking, aging population, a hidebound government-- is still a prosperous country where a large majority of the population is middle-class and well-educated.   And as pointed out in this week's article in the Economist, it is the place where bond investors run when there is uncertainty in other developed countries.  Because of debt problems in the US and Europe, the Japanese yen is now stronger than ever, at around 78 yen to the US dollar.  This is bad news for Japanese exporters, as well as tourists who visit Japan from overseas.  When I visited in 2007 I remember I got 140 yen for each dollar.  Economically, at least, I'm not looking forward to my next visit.

I'm not sure why Japan is still a safe haven for investors.  I think it has something to do with how their debt is funded.  The article points out that households alone have assets of nearly twice the national debt.  The Japanese are great savers, and tend to put their money in savings accounts, traditionally in the postal banking system.  The banks invest the deposits in Japanese Government Debt (JGBs).  Most JGBs are owned domestically, not by foreigners--in contrast to the US, where close to half the debt is owned by foreigners, who, at least in theory, are free to divest at any time.  In Japan, perhaps, there is more political and social pressure to keep the deposits in JGB's.  Not to mention that it would be difficult to find safe and liquid investments in which to place such a huge volume of deposits ($16 trillion in household assets).  They would probably have to move overseas, and be subject to all manner of exchange rate and political risk.

According to the Economist, referring to the JGB market, "...the risks of a confidence crisis, though not necessarily imminent, cannot be ruled out."  Who can tell what would happen in such a case?    Would the crisis of the PIGS (Portugal, Ireland, Greece and Spain) look small in comparison?

from www.uprofish.com

I think we can learn about the importance of education from Japan.  They became the world's second (now third) economy not because of a huge land mass, oil or minerals, or military and political dominance.  It was largely due to their talented, disciplined, educated population.   When we think about what is going on in the USA, I hope we don't forget an important long-term priority:  not deficits, jobs, healthcare or energy, but education.  In my opinion education is the most important item in the list, because even if we botch the other priorities, educated future generations will be able to make additional progress.