The Value of Money

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This past week Matthew Yglesias wrote two pieces for Slate that underestimate the value of money in our society.  His first piece was about eliminating paper money, where he argued that we could end recessions by eliminating paper currency.  In a blog post this Friday, he argued about the “Irrelevance of Money.”  None of Yglesias’ comments are directly untrue; in fact, the first paints a clear picture of how the cash we hold and the interest rate we receive drive spending decisions.  Yglesias does however, hide the other two main sources of value of money.

The origins of money are as a trading tool.  A currency, whether gold, silver, or printed paper, facilitated and continues to facilitate trade.  My cart full of corn for your week’s labor is a difficult trade if there is no means of payment beyond barter.  This is the most obvious use and value of money.

But money as a storage of value over time is money’s main source of value, and opposite to Yglesias’ claims, its obvious relevance.  Economists model the value of money using a model called “Overlapping Generations,” first formulated by Irving Fisher, then expanded upon by Paul Samuelson and Peter Diamond.

The non-mathematical description of the model and subsequent formula for the value of money goes like this:  When we are in our working age (the first generation), we generate income but in our later years we do not generate income.  Subsequently, we need to store our income from our younger years to our older year.  The way we do that is money.  Food rots and houses deteriorate, when we are not generating an income, we need to be able to provide by delaying consumption from our early to latter years.  In the model, the young “sell” services and goods to the old for “money,” and when the young turn old, they buy services from the new young generation, and so on.  In the “Overlapping Generations Model,” money increases utility and that increase has subsequent value.

Yes, money is the cause of many evils in the world, but money is not the sole cause of recessions as Yglesias claims.  Besides the everyday ease money creates in facilitating transactions, money is a necessity as a means of transferring wealth over time.


Government Sponsored Innovation Can Improve our Economy

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Technology drives the economy.  Strictly speaking, technology is any improvement to the status quo.  Economic production functions display economic growth as driven by technology, or in more common terms, innovation.

Throughout the world and throughout time, innovation is not solely the responsibility of the private sector.  A common misconception is that privately owned corporations, through research and development, propel innovation.  Yes, Google (a private company) is touted as the leader in innovation and Facebook, Microsoft, and Apple are all private firms on the cutting edge of technology and innovation, but the government has and should continue to provide both protection and incentive for innovation.  In a time when the loudest voices are calling for smaller government as a solution to economic woes, government activism focused on innovation is the solution.

Governments drive innovation and technology, which subsequently drive economic growth in two major ways.  The first is to protect intellectual property and the subsequent profits through the patent system, which provides value to ideas.  If a patent is granted in The United States, the owner of the patent is granted a monopoly over the innovation for a set number of years (roughly 20 years).  Currently, many rival companies are purchasing patents and creating legal troubles for their competitors (mostly wasting resources: time and money). 

 The current patent law is dated and does not facilitate innovation growth as intended.  There is a distinct difference in ideas as inventions and ideas that are methods.  The former deserve protection; a patent on a new drug provides incentive for the development of the drug and new programs (Microsoft’s Windows or Office computer programs) will only be created if financial protection exists.  But methods and processes should be allowed to flourish and facilitate more growth, not be held back by court proceedings.  In the words of President Obama:

“Through patent reform, we can cut the red tape that stops too many inventors and entrepreneurs from quickly turning new ideas into thriving businesses — which holds our whole economy back.”

Along with financial protection through patents, the government can directly sponsor innovation.  There would be no Google, Microsoft, Apple, or Facebook without the government’s Defense Advanced Research Projects Agency (DARPA)… they were responsible for the internet.  Check out what DARPA is currently working on.

Government intervention to create innovation is nothing new.  Never mind the advances of government agencies such as DARPA and NASA, consider the eighteenth century problem of determining a ship’s longitude at sea (the North Star took care of Latitude).  The problem had been around even before Columbus thought he landed in India, but in the mid 1700s, “the rulers of Spain, Holland, and Britain offered large monetary prizes for the solution.  [The  problem was solved] by a poorly educated but eminently skilled clockmaker.”  He used the chronometer (from a watch) to set two watches: one to Greenwich Time and one to noon on the ship when the sun was directly overhead. Nevertheless, government sponsored financial incentive was the means of innovation.  (Anecdote from Charles Jones’ “Economic Growth”) 

 This primitive version of “crowd sourcing” should be replicated today.  We have problems in this country… too many to name, but the government should provide a means for entrepreneurs and innovators to find solutions and reap financial rewards.

Teacher Value Added Ratings

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A year ago, the LA Times published a ranking of over 5 thousand third through fifth grade teachers based on their value added scores.  If you are not familiar with Value Added Ratings, they are a statistical technique that measures how much a teacher’s students improve on a standardized test over the year the teacher works with those students.  These ratings are very controversial, especially as a means to evaluate teachers.  To a parent reading these rankings in the LA Times, they seem like a say all end all evaluation of their child’s teacher, prompting calls to change classes and fire teachers.  In May the LA Times released value-added ratings for over eleven thousand more teachers without addressing the intricacies of the data.

Last winter, I analyzed Value-Added Ratings, specifically as a way of evaluating teachers.  Here is a link to my paper (see pages 3-6 for a literature review on the subject and p. 6-8 for a look at the economic model, while p. 9-17 are a critique of the method).

Here is a summary of that paper:

Economists and educational researchers studying student achievement return consistent results about teachers: they matter. While researchers agree that educational achievement depends on a quality teacher, disagreement among both economists and educational researchers occurs when considering what constitutes teacher quality.  Clearly, one of a teacher’s specific duties is to improve student performance and value added statistical methods do measure student progress, but the issue arises when that progress or lack of progress is considered completely the effect of the teacher.

This paper concludes that if school administrators only evaluate teachers on student progress, then they may not be measuring the teacher’s total value to students.  The review shows that many factors, both observed and unobserved, can affect student achievement and that teachers have the ability to impact their students in ways that standardized tests cannot measure.

In a 2008 New Yorker essay, Malcolm Gladwell compared hiring a new teacher to drafting an NFL quarterback.  In both professions observable characteristics do not translate to production, whether on the field or in the classroom.  In the NFL, coaches can examine statistics that their quarterback directly controls and that are easily observed: completions, yards, and touchdowns, but observations from college games do not translate to NFL success.  Meanwhile, school administrators only evaluate teachers on observable characteristics such as experience, highest degree, undergraduate university attended, and in a recent number of cases Value Added Ratings. 

Just as a quarterback’s college statistics do not directly indicate NFL performance, easily measured or observable characteristics of teachers are not always correlated with student success.  Value added scores vary significantly from year to year and only measure student improvement on standardized tests, not necessarily learning.  If, over a ten or fifteen year period a teacher’s Value added score was consistently higher or lower than average, then the scores can tell nus something about the teacher.  But looking at one score from one year and publishing that as an all encompassing value of a teacher is unfair.

Many factors, both observed and unobserved, can affect student achievement; teachers have the ability and responsibility to impact their students in ways that standardized tests cannot measure.  If school administrators only evaluate teachers on student progress on a standardized test, then they are not necessarily measuring the teacher’s total value added to their students.

A Conclusion to the Wrong Debate?

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While it seems that a deal is in place to raise the debt ceiling so that our country can pay its bills, we are missing the real problem facing our country: ECONOMIC GROWTH.  The debate and ultimate compromise only focuses on a symptom and ignores the real problem that our country is not growing and shows no significant indicators that it will change its course.

If the United States grew its GDP by 1% more over the next 3 years (than current projections), we would not have to worry about our spending on Social Security or other entitlement programs.  Significant economic growth combined with a decrease in our presence and subsequent funding for the wars in Iraq and Afghanistan would allow our country to pay for our commitments (social security, etc.) and a new stimulus (to improve our infrastructure, increase our human capital, and promote employment).

Stabilizing our economy for long-term growth should be our main concern.  The first step is always to acknowledge the problem and I have not heard our politicians in Washington or any of the 2012 candidates recognize that our main concern should be economic growth, not symptoms such as debt, health care, taxes, or entitlement programs.  Once our fiscal house is in order, solutions to our symptoms will fall into place.

Does it pay to go to College?

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This weekend, the New York Times included a section called “Education Life,” which featured some discussion of the purpose, role, and value of grad school.  One of their “Most Emailed” articles is titled “Master’s as the New Bachelor’s” by Laura Pappano. I wanted to share a few comments given some research I had done on the subject and I also thought this was appropriate given the article I shared at the right in the “Article I’m Reading” section of my blog: Louis Menand’s New Yorker Piece Debating the Value of College.

These articles consist almost entirely of anecdotal evidence.  I am unaware of an empirical analysis, but last year, I presented a paper by Dominic Brewer, et al. titled “Does it Pay to Attend an Elite Private College.”  The paper considered the different economic returns of different types of colleges (private, public, small, and big).  The punch line is:Yes, an Elite Private College has significantly more economic return than other colleges.  BUT, the paper considered data from the seventies and eighties.  This study needs to be reproduced given the vastly different college environment almost thirty years after the data was collected (the paper is from 1998).

Specifically, with the explosion of tuition, is an elite private undergraduate education worth the money.  Also, with such a high proportion of high school graduates going on to college, is the elite undergraduate degree worth the same, or more depending on graduate school experiences?  Also, thirty years ago students chose their college, while over the past few decades, colleges have much more control over who is admitted.  Finally, since the recession and (hopefully?) post-recession, are labor market returns any different given workers’ educational background?

So, is an undergraduate degree “worth” the skyrocketing cost?  I would agree with the paper I cited earlier by Brewer, et al. that only elite private colleges garner a return worth the significant tuition differences to large public universities.  That being said, according to Ms. Pappano’s NYT article and Menand’s “First Theory” , maybe undergraduate degrees will not provide the signal that we prescribe to them.  Is acquiring a Master’s or other graduate degree just the new sorting mechanism for potential employers?