Monthly Archives: February 2013

What the New York Times is Missing About Online Courses

An editorial in today’s New York Times demonstrates the kind of reasoning that, if left unchallenged, threatens to slow one of the most promising innovations in higher education. While belatedly acknowledging that the online revolution “offers intriguing opportunities for broadening access to education,” the editorial is mainly devoted to criticizing the courses on two grounds: first, that the attrition rate is high and, second, that these courses are ill-suited for struggling students who need more individual attention. Both criticisms miss the point of online courses.

High attrition rates in the massive open online courses (MOOCs) are actually a sign of success.  For instance, almost 155,000 people signed up for an early MITx course, “Circuits and Electronics.” Of those, about 23,000 bothered to do the first problem set and only 7,157 passed. But note that over 150,000 expressed enough interest in the course to spend a few minutes registering for a free high-skill course.  Many were no doubt drawn by curiosity, some might have downloaded just what they needed and moved on, others might have monitored the course as a backup to another course they were taking for credit.  Since the course was free to all, all of these people received at least some benefit from the class. Their experience is a success not a failure.  And the 7,157 who passed received a benefit worth thousands of dollars for nothing more than the opportunity cost of their time.  If the two professors giving the course together taught 100 students a year in their regular teaching, it would take them over 71 years to spread an equal amount of knowledge at a much higher costs.

The second complaint is that online courses do little to help struggling students.  This also is false. Since the marginal cost of offering an online course to another student is almost zero, we would expect the price to be close to zero as well.  Comparing the outcome of traditional and online courses without considering this huge savings to the student completely misses both the point and the promise of MOOCs. What the Times seems to have in mind is the gradual substitution of online courses for real ones in colleges that still charge full tuition for both.  This is a problem in that any efficiency gains are not being passed on to students. But this is unlikely to last for long. Competition, often from MOOCs, will gradually force colleges to cut the high fixed costs they have accumulated and increase the value they offer to students. The real solution for students who arrive at college “unprepared to learn, unable to manage time and having failed to master basics like math and English,” is to drastically reform the school districts that failed to teach them.  Expecting these students to pay college tuition to get the education they should have received for free is the true injustice.

Neither K-12 education nor college is governed by a well-structured market that gives students the best education for a given price. Performance seems to get dearer and poorer over time rather than cheaper and better.  MOOCs offer an important innovation that delivers education by some of the best professors from the most prestigious universities at a very low marginal cost.  The goal of public policy should be to encourage their growth and ensure that the benefit of lower costs is passed on to the student. Dramatically lowering the cost of a no-frills education will ensure that colleges eventually offer true value for whatever tuition they do charge.

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Predictions following the State of the Union

I was twittering away during the President’s State of the Union speech last week.  In the course of it I made several predictions.  Although it is easy to get carried away during the event, I think the predictions hold up pretty well.  In the interests of posterity I have copied them down here with a brief explanation of each.

1. Despite what he said, this President will never agree to cuts in Social Security and Medicare. Although the president made about as an explicit commitment as possible, I still do not think he has any intention of actually agreeing to cuts. If Obama were serious about entitlement cuts he could have struck a deal with Republicans during his first term.  Instead he raises hopes but repeatedly moves the goal posts anytime there is a hint of compromise from Republicans.  I think his statements were mainly an attempt to convince voters that he is not the one standing in the way of a deal.

2. Tax reform will not be an Obama priority. That means it will not get done. In the best of circumstances comprehensive tax reform would be an exhaustive undertaking. Because it entails great complexity, high stakes, and inevitable disagreement, it cannot be done without strong presidential leadership. There is no sign that Obama is willing to spend significant capital on this issue.

3. The President’s budget will not contain many details on how to pay for the many initiatives he proposed in his speech.  To be fair, he can make others pay the cost of some of them such as the higher minimum wage and pre-K education. But many inevitably will require federal spending. The budget will not indicate how this should be done.  Nor will it indicate which entitlement cuts the President supports.

4.Within 5 years of leaving Afghanistan, the Taliban and Al Queada will have a significant presence in the country. The President has bragged about withdrawing troops from both Iraq and Afghanistan.  He does not talk about the chaos that is likely to grow in both countries once U.S. forces are gone. The Karzai government perhaps does not deserve any further American support, but there is little indication that it can maintain national unity in the absence of significant outside involvement. There is no reason to think that it will be able to maintain national unity in the face of continued opposition from the Taliban based in Pakistan. Iraq is already splintering. Whether this has security implications for America remains to be seen.

5. The President will not make a serious effort to conclude a major trade agreement.  There seems to be little chance of reviving Doha anyway.  But despite the current talk of trade agreements involving Asia and Europe, nothing will get done.  The President did not show any interest in trade negotiations during his first term, although he did finally support free trade agreements that had been negotiated by Bush. Nor has he requested trade promotion authority even though he would likely get it. The Democratic party remains opposed to bringing down trade barriers, even when economic studies show that doing so would boost growth. Even if Obama feels differently, he will not exert energy over the tough concessions that are inevitably required to complete a major deal of this kind.

Lets see how well these predictions stand up over the next four years.

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Is the Fed’s Monetary Stimulus Helping?

On Monday Janet L. Yellen, currently Vice Chairman of the Federal Reserve gave a speech laying out the case for the Fed’s current policies. Ms. Yellen is commonly viewed as one of the strongest supporters for taking action to reduce the current unemployment rate. She is also one of the likely successors to Chairman Bernanke when his term expires. Her views are important.

Ms. Yellen did a compelling job of laying out the costs of the recent recession to workers and homeowners. But is should not really come as a surprise that many people suffered over the last few years. The real issue is whether the Fed’s current policy of trying to lower interest rates by purchasing assets is good for the country. On this important question she had surprisingly little to say. She did cite a prior speech by Ben Bernanke which in turn cites studies showing that the unprecedented purchases have lowered interest rates, but this again should hardly be surprising. When the Fed is buying roughly $80 billion in new assets every month you would expect that. The real questions are whether its policies are jeopardizing our long-term future for a little extra growth now.

The answer to that question depends on a couple of things. One is the impact that government policy can have at this particular time. Ms. Yellen includes a couple of graphs that show that fiscal policy and job growth have been disappointing during the current recovery, but the slides comparing both to past recessions only start at the beginning of each recession.  It would have been interesting to see what the comparisons looked like in the year or two prior to each recession. The Fed seems to believe that the Great Recession was pretty much like its predecessors and therefore the recovery and room for fiscal stimulus should also have been roughly the same. An alternative view is that this time was different. If unemployment was artificially low before the recession, then it should not be a surprise that it has fallen more sharply and recovered more slowly than in the past. If government deficits were larger, then the scope for fiscal stimulus at reasonable deficit levels is also constrained. Finally, if much of the activity and wealth creation prior to 2007 was artificial and never backed by true economic value, then we would not expect the declines in GDP and household wealth to recover their old values. But Ms. Yellen never addresses these issues.

The Fed’s strategy is to lower real interest rates.  This will have three effects. First, it should make it cheaper for consumers and businesses to borrow. Second, by boosting asset values it should make them richer and therefore more inclined to spend. Third, it lowers the income of savers and pension funds. If our long-term problem is a surplus in spending and low savings rates or, to put it another way, too much consumption and not enough investment, then it is not clear that the Fed’s policy is wise. Similarly, if the rise in asset values is temporary and artificial, then the Fed’s wisdom is also questionable.  Again, there is no discussion of this.  The Fed’s assumption seems to be that we simply need to jump start the economy and then it will take off on its own momentum. But other researchers, notably Carmen Reinhart and Ken Rogoff, have argued that, because this was a financial recession the recovery will be longer and less responsive to stimulus.

A second criteria for judging Fed policy is whether it harms the future. It is certainly hard to argue that inflation is a problem. Not only is current inflation low, there are few signs that people expect higher inflation in the future. But the real test will come when the economy begins to grow rapidly and the Fed has to raise interest rates and unwind its position.  Just as buying assets lowered interest rates, not buying them will raise them. The recent history of the Fed is that it has been slow to raise rates when economic growth resumes. In its defense, any rate increases are always met with political opposition because they slow growth from what it might otherwise have been. In such a circumstance, inflation expectations may rise. In fact, Ms. Yellen’s speech invites such a conclusion when she makes it clear that a rise in inflation expectations would not necessarily cause the Fed to pull back if unemployment was still high. It is clear that future stores of wealth such as private savings, pension plans, and college endowments will all be lower because of the current policies.

The lack of serious public discussions of these problems gives one the impression that the Fed is winging it: pursuing unprecedented increases in its balance sheet largely because it feels pressure to do something and worrying about the consequences later. Such strategies often turn out poorly.

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