Thursday, October 23, 2008

A Hypothetical - The Furlough Semester

A few years back when the Campus was planning for Avian Flu outbreak, there was discussion of closing the physical campus to prevent the contagion from spreading, but keeping courses going online so the core business of the university would continue uninterrupted.  This was not too long after Hurricane Katrina and the idea of keeping services flowing in the face of disaster was squarely on many peoples’ minds.  I was not directly involved in the planning, but hearing about it I did wonder how we’d pull it off – all this online learning.   The planning didn’t reach down to that level of detail because there were some more basic issues on the IT infrastructure front, and how those get managed in light of keeping all staff at home.  In spite of this lack of detail, I have in mind that online learning is especially useful during tough times.  Sloan-C organized the Sloan Semester for students victimized by Katrina, a noble and useful effort.  And there has been some recent discussion on the Sloan-C listserv about online growing in response to economic downturn.  That reality was in the back of my mind in thinking about this hypothetical. 

I do want to stress that it is a hypothetical.  It doesn’t emerge from any committee I’m on nor from any policy discussion with others on Campus.  It’s simply a consequence of my general reading about the issues, the difficulties students are having getting loans (you may need access to the Chronicle for this link to work), the battering the economy is taking on a worldwide basis, and the financial statements I’m getting on my own accounts; for example, my 403B plan was down 25% in September alone.  It doesn’t take a genius to figure out that those who were barely affording attending College beforehand are finding they can no longer do so now.  How many are in this category, I do not know.  Whether Colleges should or will respond to the issue, I also do not know. They hypothetical is about one way they might respond. 

* * *

Big Public U is a residential campus in a small town.  Its enrollments have been swelling the last few years as high quality students, who would have gone to private universities in the past, have found Big Public U a well respected place, a bargain, and therefore an attractive place to go to school.  But now it seems the goose may have stopped laying the golden eggs.  High level administrators at Big Public U are afraid of a substantial fall off in enrollments from currently matriculating students who are not ready to graduate, because those students can no longer afford to attend.  They have received numerous letters from concerned parents who are at wits end about what to do.  The common theme in this correspondence is that junior should move back home to save on room and board; get a decent job, which has a better chance of happening back home; and possibly have junior go to night school. They know junior will be better off long term going to Big Public U, but they have to live in the present and they simply can’t afford to send junior away to school and pay the tuition.  They don’t see any alternative to their present way of thinking. 

The administrators at Big Public U are worried both about the immediate loss of revenue from seeing those students discontinue on Campus, the effect their lost presence will have on the quality of student life for those who remain, and about the longer term where those students who leave don’t come back and hence those students don’t get the benefit of a Big Public U education and as a result completely sever their relationship with Big Public U.  These administrators would like to see a solution where these students get a tuition break and remain on Campus.  That would seem like the ideal under the circumstance. 

But the administrators don’t think they can implement the ideal, because they have no way of identifying who “these students” really are.  If they offer tuition breaks to every student who claims fiscal exigency, then most if not all students will claim such a need.  The administrators agree among themselves that the need a way for these students and their families to self-select, where those who can afford it remain as regular students and those who get the tuition break opt for some option that is otherwise less attractive. 

After considering a variety of other alternatives, the administrators have landed on the idea of a furlough semester.  Big Public U already offers a handful of online classes during the summer, for students to take while they are home either working on a job or doing an internship.  The idea is to extend that to the the upcoming spring semester and possibly the subsequent fall semester as well, increase the number of online classes available and offer them at reduced tuition.  They classes would be available only to students who have gone on furlough, not to students who are matriculating on campus at Big Public U.  The intent of the furlough semester would be to have these students obtain a lower cost way of getting their education from Big Public U for a temporary period, with the plan that they’d return to the campus in the future when they could afford it. 

Big Public U would rather have the students take the furlough semester than have them enroll in the local community college when they return home, to keep the connection up with Big Public U and because they believe the students will benefit by taking their courses with other Big Public U students.  So to sweeten the deal and encourage this outcome they go so far as saying that credit hours earned during the furlough semester will count toward the residency requirement at Big Public U. 

Big Public U has a variety of general education courses currently taught in Blended format that have not yet been taught totally online.  These are the initial candidates for expanding the pool of totally online courses to be offered in the furlough semester.  The Administrators of Big Public U are hoping that the furlough semester is a temporary fix – after all it means less tuition revenue per capita.  But they are wary about that and are concerned that the economic slump might be prolonged.  Consequently, they’ve thought about expanding the number of blended offerings on campus as a pathway toward having more offerings for the furlough semester.  They are now working through how much of the up front development cost they can afford to finance, given the lower revenue streams they are looking at in the near term. 

There is substantial concern among the administrators that the furlough semester could be a public relations blunder, since much of their prior marketing has stressed the totality of the student experience from being resident at Big Public U and it is clear that students in the furlough semester would miss much of that.  But these administrators are taking many of their cues not from elsewhere in Higher Ed but rather from the Financial Services industry, where band aid solutions have not stemmed the tide.  They understand they must take dramatic action and that there will be substantial risk from doing so.  There’s no way around it and thus no safety play. 

Having crossed the Rubicon in their thinking that way, their attention has turned to whether they can pull it off.  There are a host of implementation issues that need to be addressed to make the furlough semester a reality.  Questions like whether section size of furlough semester courses will be the same or smaller (because of the online modality) than the equivalent on campus section, questions about whether teaching in the furlough semester will be regarded as on load or overload teaching, and questions about whether the instructors will be adequately prepared for conducting their furlough semester courses and whether the students will be prepared in taking them.  In turn, those issues about the furlough semester are likely to cast some light on the practices behind on-campus teaching and on whether any of that must adjust to new fiscal realities.  The campus administrators would rather not address the on-campus situation now, because they really don’t know what the future will bring and whether the problems that caused the move to the furlough semester will persist.  They are already aware that all their planning about energy use and conservation measures that seemed sensible a few months ago now seem draconian given the current modest price of oil and how much that price has fallen in the last couple of months.  Consequently, they’d rather wait to have those discussions till they better understand the long term.  But they recognize as inevitable some of these conversations, given the need to go ahead with the furlough semester.  

This is the bind these administrators find themselves in.  The furlough semester is an imperfect solution and they understand that.  But sitting on their hands and doing nothing seems worse.  The furlough semester does allow some of their current needy students to continue with their studies and maintain their relationship with Big Public U.  That’s a plus.  These administrators are hoping that’s enough.

Wednesday, October 22, 2008

Which prices are flexible and which are sticky?

Apparently OPEC producers are struggling because the price of oil has dropped precipitously. Shockingly enough, the economic downturn has lowered demand!

The airlines started to charge for baggage in mind June. According to this graph, the price of gas at the pump then was over $4/gallon. Now it's back down to about $2.70/gallon, what it was a year ago. Will the airlines get rid of their charge for baggage? And, if so, how long will that take.

Saturday, October 18, 2008

Does Pavlov's Dog Evolve?

Habits are interesting things to ponder.  Once formed, they are hard to break.  But why do they form to begin with?  Do we subconsciously make repeated decisions habitual to free up some mental bandwidth for the non recurrent stuff?  And, if so, are those habits determined in some optimal way – to an economist that means looking at the recurrent situation as one big choice problem and asking what’s best in that case?  Good habits, perhaps, can be considered from that point of view.  Bad habits, obviously, are sub optimal, perhaps pernicious.  I, for one, have some of both. 

I’m particularly interested in learning about changing habits – either deliberately breaking bad habits and replacing them with something else, or getting habituated to some new behavior where there had been no habit previously. 

On a personal level, recently I’ve tried in two different dimensions to deliberately change my habits and have a few observations based on that.  First, I’ve tried to reduce my caffeine consumption, particularly after noon.  Now if I go to the coffee place in the afternoon I will be conscious of the issue and order a decaf Americano.  Flavor-wise, straight decaf coffee doesn’t make it for me, at least how it’s made at most places around here.  The Americano is better, sometimes very good, other times a little metallic but not too bad.  It’s a little bit more expensive than the ordinary decaf, but for the time being I’d rather pay for that than have decaf coffee or do without entirely.    I do still drink a lot of regular coffee in the morning.  So I’m not sure there is a big effect overall.  But maybe it reduces that burnt out feeling in the late afternoon.  And maybe it will let me start trying to reduce the coffee in the morning in the near future. 

The other area is exercise where for the last few months I’ve tried to increase my activity level and push myself to get a good workout.  So I’ve combined the stationary bike (low impact on the knees which is a big deal for me) with lightweight dumbbells, to give the arms some full motion activity, and then that’s interspersed with some other leg exercises while standing.  I’ve reached the point where I rely on that as an important part of my day, just like checking email in the morning is part of the routine.  While I’m on the stationary bike I watch DVDs from a TV series (right now I’m on 24 season six) as distraction and as a way to time myself.  I do between one and two shows per sessions.  I used to jog and am noticing some similarities.  Fifteen years ago when I jogged regularly I’d do between four and five miles – not very fast, about 9:30 per mile.  After the second mile or so with the heartbeat elevated, a euphoric feeling would begin.  It would sustain pretty much through the rest of the time unless I’d get too dehydrated or something would start to hurt.  But it doesn’t happen until about two weeks in of regular jogging – at least 5 times a week.  That’s the same with the bike.  That sense of euphoria makes it easy to keep going once it sets in, but you need to do the exercise regularly in order to experience it.  And what I’ve concluded about making exercise a habit is that it becomes easier to get started, when there is no euphoria and there is some stiffness until the muscles warm up, and for those first two weeks where it’s work rather than play.  If exercise weren’t a habit, I’d opt out most of the time.  So in this case habit formation is there to overcome my personal inertia. 

It’s easier for me to make new habits, there is is some invention in that and I value invention, than to try to get rid of bad habits, which for me are mostly about binging, particularly in the food department.  On that score, I’m better off when on the road, especially if there is nothing in the refrigerator in the hotel room.  I don’t need the junk food at all, but have a tough time resisting when it’s there.  This is an area where economics breaks done, because it doesn’t distinguish between choice, on the one hand, and will on the other.  My choice is to do without but my willpower is nil. 

This has been a lifelong battle.  In the summer between undergrad and grad I lost a substantial amount of weight by going on a one meal per day self-imposed diet for 10 weeks.  For about 20 years after that my weight stayed at around the same level and I looked more or less normal – jogging was a regularizer and my binges were not too out of control.  That summer 1976 marked a revolutionary change in my life.  I was a different person afterwards than before.   It’s instructive to note that I had essentially no obligations that summer until I headed out to Northwestern.  So I could go on the severe diet without concern for how my disposition would affect my working with others, because I wasn’t doing that.  Twenty years later when my knees got too bad to jog regularly I had that midlife crisis I mention in the About Me segment in the sidebar, I started to revert to my old self.  In the mid ‘90s, when the weight started to climb, that process was evolutionary and took place over several years.  Now I’m wondering whether the process can reverse but still in an evolutionary manner.  Can I get the desired results through modest changes, akin to changing my caffeine consumption in the afternoon?

* * * * *

In this piece I’m mostly concerned with changes in intellectual habits.  We learning technologists don’t talk about this much if at all when we discuss how we support teaching and learning.  But clearly, much “instructional design” is aimed overtly or implicitly at affecting the intellectual habits of students.  The expression “learning habits” is odd and uncomfortable coming off the tongue.  The expression study “study habits” is familiar.  But I will stick with the former in what follows.  I hope to make clear why. 

And I will focus on large classes where there are special challenges for the instructor in keeping students engaged and focused on their learning.  There are two technologies, in particular, that have become the mainstay of such large class instruction.  First, there are clickers.  Second, there is the quiz system that is part of the learning management system.  In my college, and I believe across Campus as well, these technologies are intensively used.  Both of these technologies offer ways to hold students accountable for their efforts.  We know from a study we are doing on a blended learning class that clickers positively affect class attendance (we don’t know the magnitude of the effect).  In this sense the clicker is the modern day equivalent of the Delany card.  Of course, clicker technology can do more than that.  But when you ask students if they go to lecture, the reluctant ones mention the clickers while the willing ones don’t.    The instructor understands this and uses the clickers, in part, as an incentive device. 

Likewise for the quizzes in Learning Management System, which serve not just to test the students’ mastery of the concepts, but also serve to encourage the students to prepare so they can do well on the quizzes.  This incentive “works” in that the students do put in effort to get a good score.  The motivation is provided 100% by extrinsic reward.  Students get course points on the quizzes in proportion to their score.  Likewise, students get participation points for answering clicker questions. 

Instructors giving out points for performing a task is like Pavlov’s technicians ringing a bell.  The dogs drool at the sound of the bell.  The students put in some (perhaps nominal) effort when there are points on the line.  This is a habit that we have created.  The question is whether there is any real mental nourishment as a result of the habit.

The most immediate way to measure whether that is the case is by looking at exam results.  Do students do better on exams as a consequence of this Pavlovian conditioning with quizzes?  When the quiz pool of questions is the same as the exam pool, the answer is yes, it works.  This is the ultimate in teaching to the test.  But for that very reason, one must be suspicious about whether any real learning is going on.  A better way to measure would be for the two pools to be independent and for success in the exam to require students to be able to transfer what they learned from the quizzes to an essentially novel setting offered up in the exam.  When I used to teach intermediate microeconomics, for a time I would write parts of my midterms this way.  My teaching evaluations suffered as a consequence – “test us on what we know,” that sort of thing.  Ultimately I caved on that.  But I also came to realize that this too wasn’t measuring what I wanted to.  Students who had lots of math modeling experience (engineering students, for example) were at a huge advantage.  In other words, this didn’t measure what they learned as much as it measured what they knew beforehand.   As I’ve written elsewhere, the best tests are oral exams.  The questioner can become well acquainted with the student’s conceptual understanding of the topic.  But, this type of testing doesn’t scale well.  That’s why it is used so infrequently and not at all in large classes. 

On occasion I would do presentations with Stan Smith for new faculty in the College of Liberal Arts and Sciences.  Stan taught Chemistry for many years, one of prime content developers in Plato and then later with WebCT.  Invariably he’d demo one of his quizzes with video of lab experiments.  Then he’d present survey data of the students that would show they overwhelmingly “liked quizzes.”  I can’t recall if he had any open ended responses where they explained why.  But I can guess at the type of things the students would say. 

This would be in accord with the student view that learning in academic courses is mostly about exercising discipline – putting in the time to master the subject.  The students wouldn’t know whether they’ve mastered it or not.  The quizzes gave them that information.  (In the ‘90s when we did evaluation of software such as Mallard, one of the big benefits we observed was that the system gave feedback to students in a way that didn’t personalize their failures, so it allowed them to learn from their mistakes without getting stigmatized in the process.)  To that, we have to add consideration of the deadlines, which the technology enforces very well.  Students have trouble with time management.  The deadlines force them to (perhaps at the last minute) put in the effort.  I don’t think it a stretch to say the students feel that they lack willpower and the technology as aid is a substitute for that lack of willpower.  Is this starting to sound familiar?  Anyway, that’s my story for why they report liking the quizzes.

To sum up students, who are extremely instrumental about their College education, view classroom learning as a matter of discipline and have been trained from grade school to respond in a Pavlovian manner when course points are on the line.  In turn, instructors who teach large courses leverage the technology to get students to “participate” and “do their homework” and on that score the technology use seems effective.  It may also seem effective from the perspective of exam scores, where these type of interventions do seem to provide performance improvement or, at worst, do no harm. 

My fear, however, is that we’re deluding ourselves and that students are getting “intellectual junk food” this way but pretending it’s a real meal.  And the habits that are developed in this process are bad ones; the instrumentalism can produce cynicism, anger, and end up blocking more open attempts at learning.  So, the question in my post title is about whether there is a way to evolve away from this habit to something else that would be more supportive of learning.  Then, stretching the metaphor to to its limits, the question to ask is: what sort of mutations would cause this evolution to occur? What should we be looking for and what changes might we encourage?  I’d like to ask these questions both from a within course perspective as well as considering the student maturing going through the curriculum.  For the latter, it’s clear that the student is more likely to be in these high enrollment classes as a Freshman or Sophomore, since these classes are apt to be General Education courses or introductory courses in the major.  Does the bad habit, once acquired, persist through the rest of the student’s coursework?  Or does the student’s behavior change as the classes come smaller and presumably have more human interaction?  And how might we encourage the one instead of the other?  Those are the issues. 

Now an aside that will help frame these issues.  The last couple of weeks I’ve been attending a seminar on community based learning.  The core idea is that by putting students in a different setting, one with needy members of the community, the students can benefit these community members with their efforts and at the same time intellectually advance in the subject matter that they are studying.  We did a series of breakout groups and had those who’ve got experience with community learning talked about the successes and the impediments.  A theme that came out repeatedly was that the nature of the student mattered.  Some of the students are self-starters capable of doing productive things without direction.  Others seemingly are willing to sit around until they’ve been told what to do.  But the community organizers and teachers who’ve set up the community based learning activity can’t be everywhere at once and don’t have enough time to provide detailed instructions for the students on a regular basis.  So the self-starters succeed and the other students do not. 

The questions, then, are whether students are self-starters about their own learning and if not whether they can be encouraged to become self-starters. For me being an intellectual self-starter means having a path into the subject matter that is pursued on its own accord, quite apart from any “points” or other incentives provided by the course. 

In some cases, the students will have an independent path, unrelated to the course.  The blended course I mentioned previously is an introductory Finance class, focusing on Corporate Finance.  Given the events of last several months, you’d have to be living on another planet to not know that Finance issues have been dominating the news, so most everyone has an independent path on this subject.  But having been provided with the path is not sufficient.  Are people actively pursuing that path, making sense of what’s going on through their own inquiry?  And are they pushing themselves intellectually to figure out what’s going on?   Or do they settle for what’s spooned feed to them, on CNN, the Daily show, or other lowest common denominator outlets?  

When students do have an independent path into the subject instructors can help the students in several different ways.  But there is a delicate question to address first.  What, if any of this, should be subject to assessment, via clickers or quizzes or some other way? And what should be advanced in a softer way, merely as as suggestions for students to do with what they will, with some students undoubtedly asking that death march to the instructor, “Will this be on the test?”

I believe most if not all of this should be done as suggestion.  If the underlying goal is to get the students learning habits to evolve, sticking with multiple choice assessment is not good.  That many students won’t come along for the ride should be anticipated but ultimately ignored as long as some do.  Let’s focus on those students.  We can worry later about how to swell their ranks.  For now, let’s ask what we can do for them that are willing. 

One idea is to direct their reading by suggesting authors, columnists, bloggers, anybody they should pay attention to because the writer has a strong and well articulated point of view to which the students may not have been exposed at all or only partially so.  Directing student reading down a non-course related path may seem extraneous.  But for our intellectually curious students, it’s a value add.  It’s a good way to help them make connections. 

Another idea is simply to offer framing questions.  We all gather data, information from new sources, ideas that others are spewing.  But we may miss the forest for the trees or even if we make out some glimpse of the big picture, we may still miss significant pieces.  Helping others on how to consider things is potentially an enormous benefit.  If they get to the “Aha!” they will have learned something substantial.  Further, they are likely to be very appreciative and then there is the potential to leverage that appreciation. 

A third idea is to model what traversing the independent path looks like.  Keeping a blog on the instructor’s sojourns down the path with links to sources and commentary provided by the instructor and encouraging students to do likewise, sharing these writings with other students, is perhaps the best way to walk the walk.  More students will read the instructor’s blog than will start their own, but remember these are suggestions only and the aim is for them to choose for themselves how involved they want to get. 

Regardless of the way the approach is made, an obvious intellectual puzzle will be created.  How does one tie what is learned by going down the independent path from what is being taught in the course?  Where are the connections in the ideas?  How does knowledge of course content help to illuminate the way moving down the independent path?  Many students may only pose these questions implicitly.  But having done so, their learning habits will change.  They’ll no longer be Pavlov’s dog.  They will have become instead a self-starter for their own learning.

Actually, I don’t think it’s that simple.  I argued that way because it’s easiest for putting forward the ideas.  A more complex, though still rather simple way to consider the issues is to the view the students as self-starters in some dimensions but as Pavlov’s dog in others.  Not everything is independent inquiry even among the most thoughtful people.  Some things you do out of obligation while other things you do purely for the credential it will generate.  In college, I’d like it to be the case that all students have some aspect of self-started learning that drives them.  If we had that, I’d be quite OK with the students being instrumental about their learning in other areas.   In other words, we’re all both self-starters and Pavlov’s dog and the question in each particular case is which is it?  Then we can think of these instructor provided suggestions as a kind of intellectual marketing.  That in itself is not sufficient to cause a fundamental change in the student’s learning habit.  But it can serve as a spur for student efforts that do cause such a change.

It’s also important to keep in mind just how fragile things are when in that transition phase where the learning habit is subject to change.  Why start down the path? Because something tickled the intellectual funny bone and the student wants more of that.  If those early encounters don’t pique the curiosity, it’s a no go.  Even if those early encounters seem exciting, other things may get in the way.  Students who do have will power regarding their studies tend to knock off their known obligations first.  Following an interest that won’t impact a grade may simply get lower priority – if there’s time fine, but if not c’est la vie.  Pavlov’s dog is a highly ingrained habit.  One shouldn’t expect it to disappear at moment’s notice.  The charisma of the instructor likely matters as a counter weight.  Students will try things because they are inspired to do so.  For those of us instructors who aren’t charismatic, we can at least show our passion for the subject.  That might help in getting some students through the transition. 

Students who are already self-starters will carve a path for their own when an independent path doesn’t present itself.  They’ll work problems not assigned, do independent readings, make small experiments that are of their own design, pleasing themselves only, not trying to serve another master.  This blurs the work-play distinction.  Learning is as much about wanting as about doing.  We want to play because it’s fun.  We don’t play because doing so is productive.  Carving an independent path is not a matter of will power.  It’s a matter of self-expression.  It fills an inner need. It is the source of deep learning but the self-starter is not being instrumental in carving the path.  The activity is valuable for itself. 

The question is whether those things can be taught or if only some students are capable of acquiring the self-starter perspective.  I don’t know the answer, but here is my hope.  I believe many students can learn this and would in fact do so if they came to be that was expected of them, first, and that they’d get something out of it (akin to the euphoria after strenuous exercise for a period of time) second.  The instructor is probably not in a good position to teach this – there is too much of a chasm between the instructor and the students.  Good students who are in the same classes as their more ordinary performing peers also likely can’t teach this to those peers, especially if those labels of good and ordinary have been cemented in.   Again, the so-called ordinary student will feel a chasm that blocks the change in behavior. 

The best chance, it seems to me, is for ordinary students who’ve made the leap teach their more junior peers.  They’d have credibility precisely because the distance between them and the students they aim to teach is not so great, mostly a gap in maturity, not in orientation.  This is why I’m so high on peer mentoring of this sort.  I think it can have a profound effect on the learning habit, by encouraging the more immature students to start carving their own paths.  If Pavlov’s dog is to evolve, this is likely how it will happen. 

The learning habits of our students should be a profound concern to us as teachers.  Unfortunately, we often don’t get past the more mundane factors – Do they students come to class?  Do they do their homework? Do they do a decent job on the exam?  Pavlov’s dog can do all of that.  We should want more for the students. 

Tuesday, October 14, 2008

The Vanishing Parachute Trick

Many moons ago, when I took high school biology, each of us in the class had to do a project. One of the oddballs in the class, a clever guy with a strange sense of humor, forgot that the project plan was due at the end of class one day. When he discovered his mistake, then and there during the class session he wrote up something that he'd turn in as his project description. It went something like this.

A mouse wearing a parachute would be dropped from a certain height to see if the mouse survived the fall. If the mouse survived, then the next day the experiment would be repeated except the radius of the parachute would be shrunk by an inch. Then again for the following day and the one after that, till either the mouse was dropped successfully without a parachute, a validation of evolution in the field, or the mouse would splatter on the ground, supporting the counter hypothesis. I thought it both funny and ballsy that the student would turn this in. Needless to say, the teacher didn't agree. My friend got an "F" on that project.

That was forgotten long ago and I wouldn't have recalled it except for reading this piece on NCLB. Lo and behold, it sure looks like the authors of NCLB plagiarized from my friend.

Wednesday, October 08, 2008

From Where Does Economic Policy Come?

Unlike the VP Debate, I sat through most of last night’s Presidential Debate, walking away from the TV only for a few minutes in total when I found it especially hard to take what the candidates were spewing out and only a couple of times in the entire 90 minutes session. While I persisted in the watching, for the most part I was underwhelmed. The candidates mostly stuck to their scripts from the campaign, rather than come up with new things that might help in the current crisis. Obama was better putting the narrative to his prior held positions and making a coherent argument. McCain seems to be all over the place. But truthfully I think the election is over, not because of who McCain is, but rather because no Republican could win in this climate.

McCain did come up with a new idea. He didn’t generate it. The idea is attributed to economists Martin Feldstein and R. Glenn Hubbard. It’s based on the notion, something I agree with, that for those troubled mortgages where the property represents the primary residence of the occupant that the efficient social allocation is for the residents to remain in the property rather than have the property repossessed. With that as a starting point, the next thing to observe is that the in many cases the face value of the mortgage now substantially exceeds the property value. That is the classic condition for when default by the homeowner is rational. So to avoid default and keep the current owners in the house, the right thing to do is renegotiate down the face value of the loan. Sounds like a good idea – in theory.

Now a personal story to try to illustrate some issues with the idea. In our prior house, which we bought in 1990 and were the first occupants to live in it at that location, determining the market value of the house was a bit of a sticky wicket. The house was an old Victorian from a town called Villa Grove, about 20 miles from Champaign. (In the map, B is where we lived, southwest of Champaign, while A is from where the house came.) After the house was moved it was renovated at the new location. We saw it only after it had been finished. It was a little bit out of our price range at the time, but we fell in love with it – beautiful interior woodwork, very high ceilings, a lot of charm to the place. The house was in a small community of other Victorian homes that had been similarly moved from other locations and renovated at the new site. The new location was in the middle of corn fields – 8 of these houses out there in the boonies, each of them with a unique character. We originally looked at a house next door that ultimately one of the developers inhabited. Only upon seeing that one did we find the one we bought.

The problem was how to price the place. It was one of a kind – essentially no comparables. When the house was appraised for our mortgage, the appraisal came in exactly at the price we had negotiated with the seller. I read the appraisal and since there was a requirement that an appraisal have the price of three comparable properties included, there were 3 properties listed with their latest transaction price. I don’t remember what those properties were but I do remember feeling that these were substantially irrelevant, that either the transaction was more than a year old, the property was not close to ours geographically, or the houses themselves were too dissimilar. If the appraisal is an entirely independent valuation of the house, the probability is nil that it will come in at exactly the negotiated price. In our case, the appraisal was clearly just a necessary document so the bank could make the loan, without conveying much if any additional information.

I believe we’re in essentially the same boat for these properties financed by sub prime mortgages. We know the property values have fallen due to the bursting of the housing market bubble. But we don’t know what current property values really are and there isn’t a good market test for that because that market has essentially dried up. The immediate alternative to the current owners living in the house is not occupancy by some other family. Rather it is leaving the house unoccupied so the holder of the mortgage can ultimately resell the property at some unspecified time in the future when a buyer can be identified. In this climate if the Government is to renegotiate the loans, then the obvious question is to what size and how do they come up with that? As we all know, the devil is in the details, and of course those details have not yet been discussed. If they were, my guess is that the plan would look like the Government is imposing price controls on housing. It may eventually come to that, but note that was not mentioned by McCain in the debate.

* * * * *

Tom Brokaw, the moderator of the debate, did ask both candidates whom they would choose to be Secretary of the Treasury. They both artfully dodged the question since the true answer is that it will be determined by a negotiation that will occur only after the election has been held and we have a new President-elect. Brokaw, of course, knows this but he was also right to ask the question because people are quite anxious now and want to understand how the course of economic policy in the future will be determined. But I think Brokaw’s question should have been modified to the title of my post, for the following reason.

We’ve had two Secretaries of Defense under President Bush, Rumsfeld and Gates. Rumsfeld, along with Vice President Cheney, was clearly a policy maker. The policies were flawed, to be sure, but here I’m asking about attributing authorship, not about the qualities of the policies themselves. Gates, in contrast, is more of an implementation guy. He was brought in to get things done after gridlock had been reached at the Defense Department and clean up the mess that had been created. One could have a Secretary of the Treasury who is a policy guy, or the person could be more an implementation guy with the policy determined elsewhere. The President-elect could be making those policies himself, based on advice he receives from his economic advisors, those formally part of his Council of Economic Advisors, and others to whom he listens who are not in named positions. But what sort of policies will they be? I thought David Brooks raised the right sort of issues in his column yesterday:

In his astonishingly prescient book, “The World Is Curved: Hidden Dangers to the Global Economy,” David M. Smick argues that we have inherited an impressive global economic system. It, with the U.S. as the hub, has produced unprecedented levels of global prosperity. But it has now spun wildly out of control. It can’t be fixed with the shock and awe of a $700 billion rescue package, Smick says. The fundamental architecture needs to be reformed.

It will take, he suggests, a global leadership class that can answer essential questions: How much leverage should be allowed? Can we preserve the development model in which certain nations pile up giant reserves and park them in the U.S.?

These questions definitely need to be answered. But, further, the answers have to be tied back to what the candidates have been saying about the reforms they want to institute. Does doing one mean chucking the other? I don’t know. That’s the question that needs to be worked through. The candidates have not sketched a picture about what 21st century regulation of the financial industry looks like, contenting themselves to lambaste the current system. So we in the electorate are in the dark on this score. That’s why I found the debate so uninspiring.

The news today about a coordinated (across many large and important nations) monetary policy response to the credit crunch suggests a move to an oligarchic and global solution to monetary policy, which seems right given the interconnectedness of the capital markets. Perhaps we also need to rethink the separateness of fiscal and monetary policy, assured in our country by the independence of the Federal Reserve System, historically a good idea so that monetary policy would be outside the domain of the political business cycle. Could it be that fiscal policy as well should be moving outside the domain of national politics because of the interconnectedness of the markets? Energy policy, in particular, might lead the way on this.

The rhetoric in the Presidential Campaign on economics issues is essentially entirely domestic, with the exception of the discussion of jobs being shipped overseas. In discussing the bailout the last couple of weeks, there was little or no discussion about the impact of the proposal on markets elsewhere. We need a new rhetoric to talk about policy that has global consequence and we need to move away from the unilateralism in conceptualizing our problems. I find the rhetoric about America being #1 especially unhelpful in this regard. The rhetoric needs to be about a community of nations acting in concert. We have a long way to go to get to that. Unfortunately, it seems that if a candidate talked this way it would be characterized as weakness rather than as strength. Obama has talked this way about our military involvement Iraq, Afghanistan, and the Middle East. Our rhetoric has international matters conceived as mostly a military issue. We don’t talk of them in economic terms.

I wonder whether the economics profession as a whole might address this and that a bunch of ideas bubble up which get embraced by the politicians. It’s far easier for this to happen with tactical ideas, renegotiating the size of extant mortgages, than it is for this to happen at more strategic policy level. And there is a counter force to doing this that needs to be met square on – the interconnectedness tends to equalize wages on a global basis. The Presidential election is now being reframed as how best to stabilize the incomes of the middle class, for example, this piece by Bob Herbert. Obama had a similar refrain we he talked about energy efficient automobiles made in America rather than in Japan or South Korea. Statements like this have visceral appeal. But it is a rhetoric of competition, not of collaboration, and it treats origin of production as an entitlement rather than as determined by comparative advantage. The rhetoric of competition, unfortunately, will keep fiscal policy in the political domain.

We’ve got a lot of thinking to do ahead of us.

Thursday, October 02, 2008

Managing "Fear Itself"

There are lessons to all of us in watching how Secretary Paulson and Chairman Bernanke manage the financial crisis. Last night on Larry King Live* Ben Stein, who most folks consider an adorable comedian but who is quite a good economist and of course his dad was Chairman of the Council of Economic Advisors under Nixon and Ford, attributed the immediate liquidity crunch the economy is under to the failure to bail out Lehman Brothers. In essence, that triggered a panic and it's the panic that got the market into a tizzy.

Later that evening, Warren Buffet was on Charlie Rose and Buffet sang the praises of Hank Paulson as the right person for the job, somebody who understood the situation completely and got things done.

Only in retrospect did it occur to me to consider the Lehman situation akin to Rumsfeld's original approach to the Iraq War, where he argued that you go with the army you have and that limited troop deployment was the right strategy for the job. The Military brass wanted overwhelming force. The surge didn't happen till four years later and, of course, the resource commitment to the War is ongoing.

But the difference between financial decision making and military deployments is that the role of expectations in the former is much more clearly understood. And in the case of Lehman there had been these other rescues fairly recently. So it is puzzling that the bankruptcy was allowed to happen - though there is also the logic that if Lehman was going to fail even if the the economy righted itself then it should be allowed then and there rather than be propped up at tax payer expense only to fail later. That is the logic of Ed Leamer's piece at the Economist's voice.

Much of the behavior of markets results from making inferences based on recent news. Panic is rational when others panic. But the early ones to panic may do so because they make the inference incorrectly. Inferences are always subjective and uncertain. It's guesswork. Being smart is in large part making good guesses. But even the smartest folks sometimes make the wrong judgment.

Everyone in the financial community has been reading the moves by the Fed and the Treasury to figure out what they should do. There is a signaling aspect to the behavior of Bernanke and Paulson that is not in Leamer's analysis.

The same type of signaling goes on in Higher Ed. Gossip abounds. Folks make inferences all the time. Everyone I know is always trying to figure out what really is going on. And the lesson is that choices that may seem quite rational to the highly situated decision maker get misinterpreted as a signal and then things go awry. Managing that is extremely difficult. But transparency is probably the best approach long term.

It really would be good to understand the thinking behind why Lehman was allowed to fail. For the Monday morning quarterback, it doesn't appear to make sense.

*It's great to see a commercial media company like CNN make transcripts available of its programming. This makes what the produce have much greater archival value and provides sustenance for the rest of us to discuss the content of their shows after the fact.