Cashing In

I thought Tom Friedman's column was interesting today.  It is about corruption in China.  The first paragraph reads:

Every so often you read a news article so revealing that it triggers this thought: I wonder if we’ll look back on that story in five years and say, “We should have seen this coming. That story was the warning sign.”

Then later in the piece he writes:

When I visited China in September, I wrote that I heard a new meme from Chinese businesspeople whom I met: “Make your money and get out.” More than ever, I heard a lack of confidence in the Chinese economic model. We should hope that China can make a stable transition from one-party Communism to a more consensual, multiparty system — and a stable diversification of its low-wage, high-export, state-led command economy — the way South Korea, Taiwan, Indonesia and Singapore have done. Its huge savings will help. 

What you don't get from Friedman is a root cause for this type of thinking.  He takes the corruption itself as the cause.  But what causes the corruption? 

One possibility is that it is endemic to communism, which ends up turning the ruling elite into the Mafia.  So China is now replaying a history that happened in Russia after Gorbachev.   Another possibility, however, is that Chinese rulers learned their lesson from American businessmen.  In other words, the "get mine now" approach is embedded in our current capitalism, which the Chinese have otherwise imitated so well. 

Read this Wikipedia entry about Enron.  Doesn't it seem a foretelling of the Financial Crisis?  Now take a look at this piece on exorbitant CEO compensation.  It may be entirely legal, hence not corrupt in an official sense, yet doesn't it convey the exact same feel? 

Friedman is right to worry about what is happening in China now.  But shouldn't he also be holding up a mirror to us and come to a similar conclusion? 

On mentoring of faculty, graduate students, and academic professionals

In today's Insider Higher Ed there is a provocative piece Be a Coach, Not a Guru.  Yet in reading it I became uncomfortable.  It cast the mentoring job mainly as coming up with ways to promote time on task for the new assistant professor (for research and writing).  I think of mentoring quite differently, as developing a sense of taste in the mentee. (What are interesting questions to research?  What makes those questions interesting?) 

In yesterday's NY Times, Frank Bruni's column was about personal trainers, both the demand for them and who does the work.  The demand has been growing dramatically over the past ten years or so, perhaps as a consequence of the rising inequality in society.  The rich and near rich are now inclined to have a personal trainer.  We teach in economics that increased demand begats entry, particularly when there aren't barriers to entry, and so it is with personal trainers.  It is a path to a good living without strong prior requirements, though there are institutes for training the trainers in appropriate method.  I mention it here because perhaps there is a need for personal trainers to do the sort of mentoring that Kerry Ann Roquemore recommends.  Certainly, it is not obvious from how she describes the mentoring function that it must be a faculty member who does the job. 

I have written elsewhere that the one sort of relationship universally understood by faculty is co-authoring.  I've had several different co-authors in economics.  Some were peers of mine in the economics department or elsewhere on campus.  Others were doctoral students under my supervision with whom I wrote a paper.  In both, unrestrained argument is the basis of the relationship - what should be in the paper, how to model it, the style of writing, the reaction of likely referees - all will be argued about.  Here argument might actually be an enjoyable thing.  It is good to get somebody else who cares as much about the paper as you do to offer up an opinion or to react to your own stated opinion.  If this is done with respect it works well.  Sometimes there is disagreement without an obvious resolution and sometimes egos gets bruised.  So it is not always pleasant.  But it doesn't work if you pull your punches.  You have to say what you think. 

Peer co-authorship, at least in my experience, is based on comparative advantage or, once in a while, prior friendship that leads to the sentiment - we should write a paper together.  When it works well both co-authors have ownership of the entire work and both grow from the experience. 

Co-authorship that is the byproduct of supervising a dissertation is a different animal.  Part of the function is to train the doctoral student how to do research.  It is thus in the spirit of the master and apprentice.  In Roquemore's terms, the master is a guru.  The dissertation supervisor will often play that role. 

There is the question: has the doctoral student learned the lesson in the process of completing the dissertation so is a fully formed researcher when starting in as a new assistant professor?   The alternative would be that the assistant professor is still a work in progress and requires fine tuning in his or her approach to research.  I think the alternative often is the reality.

Much of this would then happen in the departmental workshop and/or when the various faculty who do research in the same area go for lunch or coffee and discuss their respective work.  One thing not in Rocquemore's piece at all is an understanding of how others read papers when in working paper form.  Knowing that, one becomes a more effective writer.  It is not something that can be learned by the new assistant professor when holed up in the office trying to crank out some piece.  The senior scholar in the area will have undo sway in shaping answers as to what counts as interesting research.  It is not blind acceptance by the junior faculty member.  But it is welcome opinion. 

* * * * *

There is a different sort of role for mentors that are neither coaches nor gurus, but might include some aspects of both.  The existence of this other role is why I included academic professionals in my title.  Inevitably, work brings with it a variety of tensions - personality conflicts, cliques that don't play well with each other, folks on high having unrealistic expectations based on the reality on the ground, etc.  Wrapped up in these tensions, one needs a confidant.  The first function of the confidant is to allow the person to vent without that impacting the situation for the worse.  The second function is to help the person think through concrete steps to take in an effort to improve matters. 

In my years as a learning technologist, I benefited enormously from being on the CIC Learning Technology Group, which was comprised of my peers at the other CIC campuses (the Big Ten + the University of Chicago).  Our meetings were interesting but the real high point was the dinner the night before, where folks shared their latest (mis)adventures on their campuses.  We developed a trust and fondness for one another.  In turn, this allowed a variety of one-on-one discussions on specific points.  And it meant that at a national conference we had ready dinner companions.  In this way each of us was able to benchmark our situation and to learn from the innovative practice of our peers. 

Not everybody is fortunate to have such a well defined peer group that can assist in a mentoring function as needed.  But there are reasonable alternatives.  Professional development activities that bring together people from different campuses offer an excellent source for ongoing networking.  Likewise do large projects that have an inter campus aspect.  And sometimes, conferences themselves are sufficient for this purpose, though in my experience one tends to stay with the group you already know at conferences.

It is perhaps possible to have a confidant on the same campus, if the person is removed from the situation of the specific unit in a way where there is no vested interest in the outcome other than that the mentee fares well.  But I think it can't happen within the department, where the confidant will have a stake in the outcome.  One might have confidants in the same unit, but they play quite a different function.  One then vents at one's own peril. 

The part of being a confidant that is like being a guru happens if the confidant is further up in the hierarchy at their institution.  People at different levels of the hierarchy are apt to ask different sorts of questions and frame things in different ways.  The more junior person can't know this in advance and may struggle in vertical relationships for that reason.  When I was a faculty member at the Educause Learning Technology Leadership Program, we had attendees read The Seasoned Executive's Decision Making Style.  It is a good start into defining the problem.  But I doubt reading that is sufficient for the junior person to make the step up.  It takes practice.  The confidant can help with this by offering critique to the mentee's thinking. 

The part of being a confidant that is like being a coach is to help work through an action plan and to encourage patience to give the actions time to take good effect.  I don't know if this is true for all confidants, but when I play the role I don't care about the specifics of the plan.  I do care that the thinking is sensible and that the decisions made follow from the analysis rather than from some pre-judging of the the situation.  This is all done where the mentee can ultimately reject the approach.  My experience is that this is very much like problem solving when getting stuck.  The discussion, therefore, is about ways to get unstuck. 

* * * * *

Let me return to this early question.  Should the coach be a faculty member when the mentee is an Assistant Professor?  I now want to advance an argument that it should be a faculty member.  The coach needs to be trusted by the junior faculty member.  Would new Assistant Professors trust professional coaches who are not themselves faculty?  My guess is that they probably wouldn't.  Indeed, I don't think that being a senior faculty member in itself is sufficient to generate that trust. 

Trust is gradually earned.  And in my view it emerges when playing some of the other roles I discussed above, much of which is as a guru.  Roquemore wants either/or and then in that universe opts for the coach alternative.  My point is that both are probably necessary and that for this to work for the senior person, the guru stuff is essential as that is where the intrinsic interest will lie.  Roquemore is fairly linear in asking what works for the mentee.  She needs to be more iterative and ask what works for the relationship and why.  At least, that's how it seems to me.

On the tone in writing, the subjective-objective distinction, and the consequence of micro-blogging

Fallen Idols is a piece about loving an author's prose, from that conjuring up an imagined personality of somebody who could produce such wonderful stuff, then by happenstance meeting the author and discovering to one's dismay that the guy actually is a jerk, though at the end of the piece there is an example given of a wonderful author who is also a really nice guy.  What I want to distill from this piece is that the products that a writer produces and the writer's personality are two distinct things, not one and the same. 

With Facebook the experience is quite different.  The vast majority of my friends are people I knew in some capacity well before we started to interact online.  So there is some impression of the personality first.  Only later does one confront the writing.  In many cases I haven't seen these friends in person for quite a while.  So I wonder when reading what they've posted whether they are still as I knew them, if I ever really knew them well to begin with, or if their personality has morphed in the interim with online writing part of the reason why.

During the week when I go to the New York Times, I begin with the Opinion section.  (When I was an undergraduate, I started with the Sports section.  Now there are other Web sites to indulge that taste.  On Sunday I might go to the Magazine or Book Review first.)   My attention span is limited and I start with what I expect best to grab me and from which I expect to learn something.  When I do read straight news pieces, I'm often unsatisfied with what is given, partly because it seems only half a loaf - they can't write about conjecture and must stick with verifiable facts (the two independent sources rule), and partly because in their need to offer "balance" they actually present a distorted view.  Op-Ed pieces are not so constrained.  They present the author's point of view, supported by evidence to be sure, but without making any representation that this is objective truth.  It's the reader's job to decide where truth lies and how much the author is bending it to satisfy his ulterior purpose or to reject objective reality entirely and then view the piece simply as an impression of what's going on.  The reader may then embrace some aspects of the opinion without swallowing it whole.

Long ago I lost the fear of using the subjective in my own writing.  Many younger writers (particularly the students I teach) haven't found this comfort zone yet.  They tend to write like an eye witness and are very descriptive about what they see, but then refrain from synthesizing ideas from multiple sources into a coherent viewpoint.  It will take some time for them to develop their approach, which possibly might include inserting themselves into the writing at various junctures.

Something else seems to have happened with many of my Facebook friends, most of whom are middle aged, like me.  Their posts are very brief, mainly one sentence or sometimes two, and while they are clearly offering their opinion, it is presented as definitive.  How could somebody else disagree?

One possibility is that they don't mean to do this at all.  They are simply embracing a style that Twitter accommodates, treating brevity as the primary imperative and any need to qualify the opinion as secondary (and therefore absent in their post).  This is the most benign interpretation and the one I hope is going on, but I don't really know.

Another possibility is that we've lost our ability to argue, so these posts are not in some way meant as a place to start a discussion.  They are instead a way to stake out a position.  The "likes" and comments then are there to demonstrate how many other friends are adherents to the same position.

A third alternative is that there is only habit in the posting and not a conscious thought process about whether either of the prior alternatives pertains.  It is so easy to dash off the first thing that pops into your mind.  If you are processing a lot of different pieces of information each day, that's a lot of first thoughts, so impulse becomes the product and slower reflection doesn't materialize.

Imagine this counter factual, that Facebook posts had a 500 word minimum requirement.  I might be the only one on the planet who'd be pleased by this hypothetical.  I'm not advocating it as a marketing ploy for Facebook.  I'm putting it forward to ask, for those who would not be so put off that they continued to post, albeit less frequently, how would it impact the tone of the writing?  Would it still be as definitive or would it then move in a way to give the reader more space to judge?

If the answer is that the writing tone would change, then my follow up question is: are my Facebook friends aware of this now?  Could they keep writing the short posts and yet give the reader more room at the same time?  And if the answer is that the tone would not change, then I'd like to remind folks of the phrase, "reasonable people may disagree."  As a reader, I like to be presented with that option.

Childhood Fears

I slept through the night, which is a bit unusual for me these days.  I was having a rather intense dream right before I woke up.  Here are some fragments from it.

I was at some sort of conference.  During the week we sat at the same table with our group and got to know them pretty well.  But this was the last night and we were in a different room and sitting with different folks.  We were supposed to get something to eat and then go to the front for a purpose that I don't remember now.  My table was near an outside wall.  It was made of clear glass so you could see outside to a grassy area.  The door was open.  There was a full grown lion and a cub just outside.  The lion was peering in seeming to contemplate whether he should enter the room.  I was petrified by this.  But nobody else in the room seemed to notice.  I asked Robert, whom I knew before the conference and who was at my table, if he'd close the door.

The next thing seems to be the end of the conference and to walk back to the hotel room to get ready to leave.  As I'm walking that same grassy area is now behind a fence.  There are a bunch of camels just sitting there, not looking threatened or threatening.  I find I have too many keys in my pocket.  So I talk to the bell captain about this.

---------

When I was a kid I had this absurd fear that a lion would come to our house in Bayside and get me and my brother.  I have no idea where that fear came from but I had it with some frequency.  I believe there was a zoo in Flushing Meadows, where the Worlds Fair had been.  It was about a twenty minute car trip to get there from my house.  That a lion would escape from the zoo and find my house had a likelihood very close to nil.  As a child, however, you don't distinguish between real threats and those that are entirely imagined.

Sometime in my teens I stopped having this particular fear.  I grew out of it.  I don't remember having dreams about lions as an adult, until last night.

---------

Having read Milner's On Not Being Able to Paint, not that long ago, I have some appreciation that the subconscious works on issues that the conscious mind is stuck on.  Dreaming is important for the imagination to function well.  But as I'm writing this, I'm unsure what issue of mine is being addressed in this dream.  Nor do I understand why I returned to that same paralyzing fear of childhood. 

I wonder if I'll be able to let go of this thought during the rest of the day.  My biggest real fear at the moment is whether my back will improve enough so it returns to normal.  Yesterday, for the first time in a week, I did my stretching exercises for my shoulder, almost the full routine, but I could tell it was hurting the back a bit.  After my back felt a bit stiffer.  But this morning my back seems to be where it was before I did the stretching, so I will do more stretching in a few minutes.

There are a variety of other things that I worry about.  I will not elaborate here.  I guess the dream pertains to one of them or some of them as a bunch. 

The Progression

As kids we had Pez
And played Simon Says. 

As teens twas Ball Four
Which showed what's in store.

Well preceding PEDs
Were Greenies and Reds.

Players of renown
Alas do wear down.

Koufax quit early
As did Bob Turley.

It stands to reason
Shorten the season.

Yet nobody blames
Adding playoff games.

Stars make big money
So much it's funny.

The owners do too
It drives what they do.

Fair play goes off course
Because of this source.

While now there's testing
For PEDs arresting.

Let's hazard a guess
It won't end the mess.

So now I am vexed
Not knowing what's next.

Waiting for the next shoe to drop

Here is to hoping
The end of doping
Will be soon in coming.

Player enhancement
Far from enchantment
To Satan succumbing. 

It is the era
Of Mo Rivera
The song that I'm strumming.

So of Ryan Braun
Before the next dawn
Undo the nose thumbing.

Ryan Braun is the Lance Armstrong of MLB - ESPN via kwout

What about from riches to rags?

This is quite an interesting piece on the relationship between parent income and (adult) child income, segmented by geographic region.  This is done on a quintile basis (and for the lowest quintile on a decile basis).  The lower endpoint of the top quintile is $70,000 in income by age 30 or $100,000 by age 45, where income is measured in 2012 dollars.  I don't think I made that age 30 number, though that would have been 1985 and the inflation adjustment is hard to figure (also I really don't remember my salary then).  I did make the age 45 number.

There must be some regression to the mean in this stuff.  In other words, if parent income didn't matter at all, then irrespective of parent income the child's expected place in the income distribution would have to be the 50th percentile. That extreme presumably represents "perfect income mobility."  The opposite extreme is where the child's place in the income distribution is exactly the same as the parent's.  That would be the no mobility case.  Reality is some (convex) combination of the two.

If as a parent you are in the top quintile (not the focus of this piece) and there is some mobility, then it is possible for your child to backslide in the income distribution and thereby end up in a lower quintile.  This backsliding doesn't get much attention at all in our discourse on income inequality.  Think of recent college grads who haven't found a job and have returned to living at home.  As I wrote to one of my economist friends earlier this morning, nobody really knows if now we are in the trough of an elongated business cycle, or whether this is the new normal for the labor market.  There is a lot of economic research that suggests graduates who don't find employment after graduation will have substantially lower lifetime earnings.  This is the group for whom the backslide possibility seems most likely.  The data that the research group has collected indicates about an 8% chance of backslide from the top quintile to the the bottom quintile and about a 13% chance of backslide from the top quintile to next to the bottom quintile.

There is not a perfect equivalence here but for simplicity the bottom quintile might be thought of as those living under the Poverty Line and the next quintile those who are the "Near Poor."  (I think there are some Near Poor in the middle quintile and there may be some poor in the second quintile.)  So the sort of backsliding I'm taking about here is not from upper middle class to middle class.  That transition is happening too, with some likelihood, but is not as much of a concern.  Above some minimum income threshold, doing meaningful work may be more important than generating higher income.  Below that income threshold, however, the ingredients for having a decent life are quite possibly absent, in which case earning more is all that matters.

The focus of the research, of course, is on bottom quintile and what the prospects are for their children.  It is an important question, clearly.  The prospect of mobility shows the system is fair and encourages people to play by the rules of the game.  Lack of mobility does the reverse. 

Here are two other caveats.  If the poor are mainly recent immigrants who have come to the U.S. to pursue the American dream, that may be more acceptable in the national psyche, as it is consistent with the myths about income distribution that we grew up with.  However, if the alternative is true, where the poor have been Americans for many generations but the parents were also poor as were the grandparents, then poverty starts to look like an "absorbing state."  It would be interesting to determine whether the geographic variations in mobility that the research finds can be at least partly explained by one or the other of these.

The other caveat is that by using relative ranking in the distribution only and then doing so with a high degree of aggregation (quintiles) the situation appears more symmetric than it really is.  In particular the income bands for each quintile are relatively narrow, except for the top quintile where the income band is huge.  One might redo the exercise but on a percentile basis or by having fixed income bands, say in $10,000 increments, and then coming up with the transition matrix for that.  Were that done I suspect the results would show less mobility than what is indicated here.  (Crossing the line to the 80th percentile might be reasonably likely, but to the 90th percentile much less likely, ditto from the 90th percentile to the 95th percentile, etc.)  The downward mobility risks are probably just as skewed. 

Let me close with a point I've made previously.  As a parent, you'd like to minimize the backsliding risk for your children.  This is why you try to make sure they've had a good education.  That gives self-protection against the back sliding risk.  But there are clearly limits to how much self-protection can be attained this way.  It is why parents in the top two quintiles will come to care for the welfare of those in the bottom three quintiles.  In turn, that may provide a realistic impetus for lessening income inequality in our society. 

What factors impact performance?

This was a very entertaining golf tournament, perhaps the most enjoyable one I've seen in a long time.  It wasn't just the ending and the spectacular way that Phil Mickelson finished.  It was also the ebbs and flows on the leaderboard and the decision making that the leaders made on the shots they were to take.

Links golf played at a high level makes the players practice "statistical decision theory."  Among the random factors are the wind, which mattered a great deal, the cloud cover, which would determine how much moisture the greens held, and also moisture on the fairway in front of the greens, which impacted whether approach shots would stop short or run over the green.  Then there is the issue of the kind of lie the player has, particularly if the ball ended up in the fescue.  From the fairway, the players try to put a lot of spin on the approach shot, as a means of control.  From the fescue, the ball can "come out hot."  There are also the pot bunkers, which has a stone wall at the front and might be six feet deep or more.  If the ball ends up in a fairway bunker, that can impact the direction of shot that is feasible as well as the club selection.  Early in the week there were players hitting from the trap into the fescue, on purpose.  It was the only play they had. 

The players do make mistakes of the physical kind, meaning they don't hit the ball as they intend to.  But mostly they do.  And in most tournaments when they do that they have a pretty good idea where the ball will end up.  In this tournament, there was a lot of residual uncertainty about that.

Another big issue, of course, is the player's choice of what shot to make, a decision made in concert with the player's caddy.  As it turns out, earlier in the week the Charlie Rose Show aired this interview with Jack Nicklaus from last April.  It was interesting to hear on precisely this point.  Nicklaus talked repeatedly about the player staying "within himself," meaning taking a shot he'd execute well 19 out of 20 times.  Mostly, the player should not take a 50-50 gamble, with the exception near the very end of the tournament where circumstances might dictate otherwise.  Earlier on, the rule is patience and players should be careful not to play themselves out of the tournament by being too aggressive.

The last factor to consider are the psychological ones.  Is the player relaxed or does the player "feel the pressure."  The leaders are aware of their position and tend to want to protect it.  They play more defensively as a consequence.  A player back in the pack can but who is still within striking distance can be more relaxed, or so it seems. 

They various factors seem to interact with one another.  A couple of excellent shots make another one more likely.  A couple of pour ones and the player can "collapse" and then performs poorly thereafter.  At least it seems this way to me and the announcers certainly encouraged this inference.  This might be explained by how energetic the player feels.  Success is invigorating, while failure is enervating.  Let me focus on just two particular shots to illustrate.

The first was by Lee Westwood, who was leading the tournament at the time.  He had "made a mistake" and was in a fairway bunker, with the ball fairly close to the face.  (Note that the announcers never said the player was unlucky with the bad outcome.  If in a fairway bunker, then that was attributed to poor judgment on the player's part.)   Paul Azinger was the main "color commentator" and in the 1980s he had lost the tournament by making a bad decision playing out of a bunker.  He urged a very safe shot.  Just flop the ball out and not worry about how far it advances. A bogey would be okay.  A double bogie would be horrible.  Westwood played a more aggressive shot.  He didn't get it out of the bunker.  He then got lucky that the ball didn't end up in his own footprint.  He again played an aggressive shot.  This time it worked and got onto the green.  He did get bogie on the hole.  So outcome-wise it was the same as what Azinger would have wanted.  But his frame of mind was no good after that and he made several more mistakes. 

The other shot was my Phil Mickelson on the 17th hole, a par 5.  At the time his score was -1, either in the lead by a stroke or tied for it and he was several groups ahead of the other leaders.  The hole was playing into the wind.  He nailed a three wood off the tee and was in the fairway.   But he had more than 300 yards left to the hole.  The "smart shot" was to lay up so as to avoid trouble.  But he was feeling it and maybe he also thought that if he could pull it off he'd be setting the bar too high for the other players to catch him. He hit another three wood, got an incredibly fortunate bounce, and the ball ended up on the green.  He was able to make birdie.  That second shot decided the tournament. 

Mickelson has lost other major tournaments in the past by playing aggressive like that and getting the short end of the stick.  This time, he pulled it off.  It was his lowest score ever in the fourth round of a Major Championship.  It's all the more remarkable because his game wasn't supposed to be suited for links golf.  At the end of the day, he certainly looked like the best player out there.

Phil Mickelson wins The Open Championship for 1st time with brilliant 66 - ESPN via kwout

La Société Malade*

*The three years of French fully depreciated long ago, this translation due to Google.

This piece gives a variety of examples of things gone awry.  Is this our destiny henceforth across all endeavors?  Each example has a toe in a current news item, but also a glimpse into the past.

The operative underlying question is which of the following alternatives best applies?
   (a) This is an innovation, meaning there is an immediate benefit and a benefit that extends into the future.
   (b) This is a disruptive innovation, meaning there very well may be an immediate cost but there is a benefit that extends into the future.
   (c) This is a short run gain but a long term pain.
   (d) This is sheer destruction, with costs now and deleterious impact into the future.

The related questions are:
   (e) in prospect is it possible to tell which of (a) - (d) is going on?
   (f) in retrospect is it possible to tell which of (a) - (d) is going on?

* * * * *

Let's start with this rather gently written piece by Robert Schiller on the now virtue of renting.  Schiller's main points are that:  (1) The American Dream as signified by homeownership was an invention of the 1920s and didn't exist before that, (2) people of modest means owning a home means most of their savings are tied into that and hence they are not well diversified, and (3) if in the wake of the subprime crisis we move away from subsidizing home ownership (in effect this is what both Freddie Mac and Fannie Mae did and then, of course, there is the mortgage deduction on the income tax) then we need to find another way to encourage ordinary citizens to save. 

I concur with Schiller's points.  But what I want to note is that this wasn't always the conventional wisdom.  Indeed, it wasn't the conventional wisdom right up to the time that the subprime crisis hit.  Until then the view was that people should own their homes, even if they were of modest income, because of the pride of ownership factor, first and foremost, signified in the movie It's A Wonderful Life, and even if they were expected to turn over the property fairly quickly, say in the event they would move to a new job in a different location, because Adjustable Rate Mortgages came along and with the low initial rates that encouraged home purchase. 

It's sensible to ask why the conventional wisdom changed.  No doubt the subprime crisis is responsible.  But then you want to ask what caused the subprime crisis. Here you can list a bunch of factors off the top of your head: unscrupulous lending practices, cheap credit supplied by the Chinese and enforced by the Fed, people having earlier learned to live in a highly leveraged manner because of the run up of the stock market, flat wage earnings but rising consumption aspirations helping to reenforce the leveraged approach.

I want to look at a different factor that started much earlier.  It may have been benign when it started.  And it may have created much benefit in the near future after it came into being by making the cost of capital much lower.  I'm talking about mortgage securitization, the brainchild of Lewis Ranieri, and popularized in the book Liar's Poker.  It all started in the late 1970s.

Capital flow was slower then and innovation in capital markets didn't diffuse as rapidly.  When I started at Illinois in 1980 I rented, just like my fellow Assistant Professors.  After six years, I bought my first place, a condo.  I believe the mortgage on that place was locally held, not sliced and diced as mortgages now are.  The maximum loan possible was 80%, or if mortgage insurance was  purchased then 90%, and there was quite a lot of scrutiny done by the bank originating the loan in order to get the mortgage.  Among the things that happened to me at the time, I'm not sure they were absolutely necessary but certainly they greased the skids, I moved my financial assets from Fidelity which was definitely more modern and had a "money management account" to the local bank, and I ended up playing a round of golf at Lincolnshire Fields with my bankers, something I've never done since. They wanted to know I was an ok guy.

If you take mortgage securitization but keep all the old mortgage origination practices, that may have been win-win.  But, of course, the old practices went by the wayside.  And here what is cause and what is effect is difficult to decipher.  As John Cassidy tells us in How Markets Fail, there is a Prisoner's Dilemma aspect in markets under a bubble, where normally prudent lenders are forced by the market to offer higher rates to investors to attract their capital and, in turn, they are equally forced to invest in highly risky assets, since those have higher yields and are the only way to cover what they are paying to investors.  So while there may be truly bad guys in this story, even the good guys became bad guys as a means of (near term) survival.  In this world, mortgage securitization looks like pouring fuel on the fire.

There's one other point to make here.  In our lifetimes we saw it all before, in the Savings and Loan crisis of the 1980s.  It was not as calamitous as the subprime crisis, but it was plenty bad.  So we were forewarned.  Brakes might have been applied but weren't.  Thinking this way, who is to blame, Clinton or Bush II?  If we know in advance that Republican administrations will regulate less than their Democratic counterparts, should Clinton have allowed Robert Rubin and the Larry Summers to liberalize on this front?  The Fed, of course, also failed its due diligence.  Alan Greenspan was the genius of the capital markets, right up until he wasn't.  His career has an eerie parallel to that of Lance Armstrong.  I certainly don't want to let Bush II off the hook.  The tax cuts were ill considered and getting involved in Iraq was horrible.  As they say, there is plenty of blame to go around.  My point is that on this one we might have known, but we sure didn't act that way. 

* * * * *

Let me turn to politics.  Yesterday there was a piece by Frank Bruni about the dysfunctional U.S. Senate.  It is not just that it is incredibly difficult to get any legislation through nowadays.  It is also that moderate incumbents and potential candidates are being driven away.  One can't in good conscience serve in an organization, any organization, when one holds substantial contempt for many of the would be "colleagues."  This point is not new to Bruni's column.  We saw it not that long ago in a piece by Evan Bayh, as he was about to leave the Senate. 

In today's paper there is an equally discouraging piece by Thomas Friedman about the House.  The issue there isn't gridlock, like it is in the Senate.  It is insanity.  (Or, if you want it to put it more politely, it is that that narrowness of view blocks enlightened self-interest.)  The body now has a destructive, Far Right agenda.

This new norm, a polarized view of Congress, wasn't what I was taught as an undergraduate.  I took a course then on economic models of politics.  Among our readings was An Economic Theory of Democracy by Anthony Downs.  This is essentially the model of spatial competition by Harold Hotelling, but applied to politics.  The result was what is called, "the median voter model."  The distribution of population preferences determines the positions of the candidates, who run to the middle.  The winner is the one who best finds where the median is located.  That was the old conventional wisdom.

What happened to change it?  Downs' model abstracts entirely from the inner compass of the candidates.  It makes the candidates complete chameleons.  A more realistic picture would allow both factors to influence the positions a candidate takes.

Then there is the emergence of cynicism of the Federal government among the electorate, first as a consequence of the Vietnam War and then amplified greatly by Watergate. 

But probably the most significant change was the realignment of the parties after the various pieces of Civil Rights Legislation in the Great Society, with Southern Democrats switching party lines in great numbers and Reagan Democrats voting for the Republican candidate while maintaining their party affiliation.  The Democratic party had been a left-right party while the Republican party had been a right-center party.  There was overlap between the two parties and that enabled compromise and government function.  What we have now is the Democrats as a left-middle party and the Republicans as a right-far right party.  There is no overlap.  Some have argued that it is better this way, since now the parties are purer.  I think they are completely wrong.

Since race and racism are at the heart of this realignment and since so much attention has been given to the recent George Zimmerman verdict, with the  conclusion that young black men are still subject to massive racial stereotyping, it is worth asking why that is.  Between the Great Society and Rodney King, there was 25 years.  The polarization of the parties was still just getting started.  In The Conscience of a Liberal Paul Krugman argues, over and over again, that Reagan played the race card to lure the Reagan Democrats, who voted against their own economic interests.

It's been another 20 plus years between Rodney King and Trayvon Martin.  Growing up we were taught that time heals all wounds.  In college I learned a more sophisticated version.  Racism would end as the old guard passed away and the next generation took over.  This more sophisticated version seems to hold sway with gay rights and particularly with the overturning of DOMA, even if that decision was 5-4.  It is a different story on race, with the recent decision on the Voting Rights Act recreating a House Divided.  Krugman's argument about Reagan may be even more apropos now about the entire Republican Party.   It is a White party that must appeal to middle and working class voters in order to have success at the ballot box.  It's sad but true that the politics of resentment mobilizes people.

* * * * *

In the last few days there have been a couple of pieces about the abuse of the patent system.  Joseph Stiglitz had a piece lauding the Supreme Court decision that genes could not be patented, but then decrying how many companies pursue a monopolization strategy that is socially deleterious, blocking both current competition and future innovation.  In Stiglitz' view of the world we have gone from an approach to make the pie bigger, and thus everyone gains, to getting as big a slice as possible and to hell with what happens with the pie overall.

Then, yesterday, there was a piece about the FTC turning up the heat on patent trolls, where perhaps the worst possible abuses will be curtailed, though it may be far less than what is needed for firms to return to a growth agenda through new products and services.

There is a thought about economic growth and economic malaise that some of it is simply a sign of the times, a consequence of whether there is an underlying engine or not.  During the Reagan years that engine was the PC revolution.  During Clinton's time in office it was the Internet Revolution.  The argument goes that there is nothing comparable now.

Potential candidate engines of growth have been discussed.  The cracking of the human genome was supposed to usher in a new age of economic growth based an increasing demand for genetically engineered products.  Ditto for the discovery of natural gas reserves and the potential for cheap clean energy.  It may still happen.  But so far it's not.

Yet CEO pay has continued its inexorable rise.  Perhaps the most charitable explanation for this is that CEO pay is more tied to growth in the Dow than growth in GDP and the former has grown a lot faster than the latter, thanks in no small part to Quantitative Easing.  The outrage in CEO pay appears to be gone.  We've become numb to it.  Yet isn't it as sickening as the patent trolls? 

Robert Gordon, whom I had as a teacher when a graduate student at Northwestern, has gotten a lot of mileage from this paper about the end of economic growth.  I don't know if he is right or not.  Only time will tell.  But if he is right we're essentially in a zero-sum game.  There are some folks who know how to play that game for their own advantage very well, while the rest of us take it in the shorts.

* * * * *

My focus for the last fifteen years or more has been on Higher Ed, not economics or politics.  It's what I thought about first when conceiving this piece.  I'm writing about it last only because I think what is happening there is a microcosm of like changes in the economics and politics.

What set me off was a Special Report in the Chronicle on Monday about The Gates Foundation.  I wonder how many readers of my piece have read The Death and Life of the Great American School System, by Diane Ravitch.  I wrote about it a while back, where I agreed with her argument but felt like I was getting beaten up while reading the book.  The same point was made over and over again, with one example after another of failed Charter Schools and school systems seemingly indifferent or worse to their low income students.  So my first thought seeing the Chronicle piece was, "Look what Gates has done for K-12.  Now his Foundation is doing an encore for Higher Ed."

Gates is unlike a Tea Party politician in that his motives seem spurred from good intentions we can all endorse.  But he shares with the Tea Party politician a characteristic found in Willam Faulkner characters - total certitude with regard to approach and an unshakable persistence to achieve that end.

Gates would benefit from reading Thinking Fast and Slow and learning about WYSIATI.  He wants to apply essentially the same approach as he is using to good effect for the eradication of disease to addressing how to give an effective education to a large under served population.  Both are driven by data centric approaches.  The data about disease that are collected are informed by epidemiological models that have worked well in curtailing other diseases.  What models inform the collection of data about learning?  How well have those models performed previously? (Ravitch would say in the case of K-12, not very well at all.) 

On a listserv I'm on the very recent discussion has turned to Badges.  Ten years ago the rage was ePortfolios.  Digital certification of learning has been with us for some time.  Yet there is surprisingly little innovation on the learning itself, to my everlasting regret.

I fear we have only a limited amount of mental bandwidth to devote to Higher Ed and the Gates Foundation is claiming well more than its fair share of it.  I'd love to be wrong.  But I'd bet otherwise.

* * * * *

Some of my friends can seemingly maintain their personal equilibrium by expressions of outrage.  Get it out of their system and they can keep on keeping on.  I can't do that.  I have an ill feeling inside.  We seem to be moving from a substandard status quo to an unstable and horrifying abyss.  I can't make the ill feeling go away because I don't know how to get us to reverse course.  The world seems one big Prisoner's Dilemma and we're all trapped playing the game. 

Learning The Opposite Lesson Than The Teacher Intended

This is from Rousseau's Emile (location 1348 in the Kindle Version).

The detailed treatment I have just given to lying may be applied in many respects to all the other duties imposed upon children, whereby these duties are made not only hateful but impracticable. For the sake of a show of preaching virtue you make them love every vice; you instil these vices by forbidding them. Would you have them pious, you take them to church till they are sick of it; you teach them to gabble prayers until they long for the happy time when they will not have to pray to God. To teach them charity you make them give alms as if you scorned to give yourself. It is not the child, but the master, who should give; however much he loves his pupil he should vie with him for this honour; he should make him think that he is too young to deserve it. Alms-giving is the deed of a man who can measure the worth of his gift and the needs of his fellow-men. The child, who knows nothing of these, can have no merit in giving; he gives without charity, without kindness; he is almost ashamed to give, for, to judge by your practice and his own, he thinks it is only children who give, and that there is no need for charity when we are grown up.

I fear that much current instruction does exactly what Rousseau warns us not to do.  

Prerequisites

I am slated to teach Economics of Organizations this fall.  Though I put in a proposal to make it a permanent course, at the moment it is still being offered as a special topics class.  Last time around I had the impression the listing that way  limited enrollments.  I ended up with 17 students.  For the fall class I currently have 23 registered.  When I previously looked at the roster, in the spring, I only had 13.  So I'm glad to see it filling up.  But for some of the students, I'm wondering why they are there.

I copied the detailed roster from Banner and pasted into Excel.  Then I washed out all the information that identifies the student and kept only major, minor, and class.  Most are Econ majors.  But a few are not.  (See below.)  Should I care?

In one sense, I really don't, but the Econ department might.  An offering such as this is intended for majors in the department so that have a rich variety of courses from which to choose.  It is not meant as a service offering for students from other departments.  But, given that there are still empty seats, it really should be open to anyone who is interested. 

I do want students with adequate preparation (already have taken intermediate microeconomics) and who can do the math.  One can't infer precisely on those prerequisites from the major, but one can make some guesses about it. 

Class Profile - Google Drive via kwout

MOOC Fatigue

Of the various quotes in this piece, I found this one the most frightening:

“For as long as it’s Daphne and me running the company, I’m confident we’ll do what’s best for students,” Ng said.

Career academics probably can be good CEOs for a start up, but running a company on an ongoing basis?  And when the novelty has worn off for them, what then?  

There is a very poor analogy near the end of the piece of the form:

MOOCs are to face to face instruction like watching football on TV is to going to the game at the stadium. 

One really should work through the entire process of how knowledge gets into the student's head in a way that it can be used in a context other than how it was initially presented.  Going to class is part of that but it is the student who is the active learner (or not).  The instructor delivers the message and perhaps supplies some motivation for the student.  That is far from sufficient, however.  The student must play with the content, must give voice to early ideas that emerge from the presentation and the reading, and must negotiate through the difficult parts of trying to transfer the knowledge into settings that are not already familiar.  That other students who are doing likewise can be helpful is fine, but again it is not sufficient.  If we asked what would be sufficient, we'd be much further along than we are.  As long as we continue to focus on the delivery of the lecture, we are nowhere. 

On the business side of doctoral education, where is it heading?

One has the feeling that we are descending backwards into a Darwinian approach.  When I started as a doctoral student, back in 1976, that class had 27 students.  I hadn't realized it at the time of entry, but I soon learned that people came to the program under different funding packages.  I was on fellowship.  Some of my classmates were not.  I had applied to eight programs in Economics.  Among the places where I was accepted, three had given me money.  Northwestern and Rochester each gave fellowships.  Minnesota bundled its money with some work requirement.  I had my heart set on Berkeley, but I didn't get funding from them.  Ditto for Princeton.  So, given the realistic alternatives, I ended up at Northwestern.  Robert Gordon had written a detailed "come on" letter to those students who were granted admission.  Much later I learned that letter was controversial among the rest of the faculty.  It probably had an impact on my choice, though from a geography point of view, I wanted to get away for New York.  That mattered too. 

I was ignorant of many things when I started that PhD program.  Principal among them was whether I was committed to following through all the way to the doctorate.  I had so little economics as an undergrad that I didn't have an informed basis to make such a commitment.  As it turned out those of my classmates who had been economics majors were rudely surprised by how far the doctoral program was from their expectations.  I told myself at the time that I would go all out for one quarter and in that time not ask at all whether I liked it or not.  Just do it for a while with full commitment.  Only then come to some decision about whether to continue or not. When it was time I realized I was completely hooked, though there were aspects of the program I didn't like.  It was brutal.   My first classmate to drop out of the program did so soon after the second quarter had begun.  By the end of that first year 14 students had left the program, including some who were pretty good students.  And by being so focused on the economics, the life was not intellectual in the way my last two years at Cornell had been.  I had no far ranging discussions with my classmates that first year.  Indeed, as an undergrad I could have those discussions because we were all studying different things.  In that first year in grad school, immersed in this common experience, our conversations were rather narrow.

I also hadn't realized that my fellowship wasn't guaranteed for four years.  It had to be renewed each year and there were implicit performance requirements that needed to be satisfied to justify renewal.  Somewhere in the middle of that first year we learned that fellowship money for the second year was going to be scarcer than it had been - the overall economy in the throes of "Stagflation" and doctoral programs not immune from the consequences.  Those who were not on fellowship were competing for this scarce funding as well.  It meant the competition among the students was rather cutthroat.  You'd think this would manifest via performance in class participation and on exams.  Mainly it did.  But there were other pernicious consequences.  During the first quarter most of our readings were in the Reserve Room, but in the second quarter we had to go to the stacks and find the bound periodicals where the readings were.  Some classmate(s) looking to get a leg up would get to the article first and then re-shelve the thing in an improper location, so it was harder to find.  On one or two occasions that I recall, the article had been ripped out of the bound periodical entirely.  This was bush league stuff and left a bad taste for me and the rest of my classmates.  Fairness is not part of survival of the fittest.

I really don't know whether this sort of attrition was part of the Northwestern model, to be planned for in advance, or if it was an aberration for our particular class.  I believe the next class was much smaller at the outset, but my memory of this is quite hazy.  I do know that the Economics Program at the University of Chicago had a reputation for using the first year to weed out the mediocre students, admitting as many as 70 students for the first year, with many fewer students moving on after taking the qualifying exams (at Northwestern administered at the start of the second year).  The idea of the first year of graduate education as a lottery and hence with some brutal aspects to it seems inhuman.  The tone is captured in the movie The Paper Chase.   One wonders whether it is necessary.  I know that experience had a profound impact on my teaching.  I vowed never to call on students by name and thereby embarrass some of them who couldn't come up with a good answer.  Fear motivates.  But it also contributes to the brutality of climate.  I did not want to do that.

After the first year the tone was much more collegial, which I preferred, but I know I stopped pushing myself as hard, particularly in courses that were required but where I didn't see myself heading.  I did put in quite a lot of energy into a Math Analysis class I took during the entire second year.  But in that first quarter of the second year, in Economic History and Econometrics, my effort was much less intense. 

Another thing I didn't anticipate at all was the change in mindset that would happen when the field courses were near conclusion and the dissertation stage would soon begin.  Students are enculturated to worry about their performance in each course and care a lot about their GPA.  But having reached the dissertation stage, all that matters not.  The only thing that matters is the quality of the paper(s) you produce.  There is a big deal question whether the training in required courses, on subject matter, is good preparation for writing the dissertation.  Perhaps it is not.  During the third quarter of my first year I took a course on topics in microeconomics, or something like that, where we read different papers on a variety of themes, many in working paper form and thus not yet published.  Students presented those and critiqued them.  I may have been the only first year student in that class.  From that I got into the habit of attending departmental seminars in economic theory.  Those activities were much more relevant for learning to write a research paper.  So I had some reasonable preparation for the dissertation stage, but I would have benefited from more and many of my classmates who were doing things other than economic theory may have had little to none of this. 

Let me turn to how the TA function was managed while I was a graduate student.  That happened during the second year.  During the first year the entire role was as graduate student.  In the sense that being a TA is a diversion from your studies, a time tax if you will, the idea was that up front you should give your full attention to your graduate studies.  I subscribe to that view even now.  The TA function was deemed part of your graduate education and therefore no money compensation was given for it beyond the fellowship.  When I started in the program the requirement was to TA four quarter courses (typically two recitation sections for two quarters).  Between my first and second year the requirement was raised to six quarter courses.  It is very difficult to see that change as stemming from a graduate education need.  (It is much more readily explained by the need to reconcile the staffing of recitation sections with the paucity of fellowship money at the time.)  There was a committee for graduate student issues in the department and I was the representative for the second year class on that committee.  I complained about the issue there, but to no avail.   After I had become a faculty member at Illinois I learned that this requirement about being a TA had come under investigation by the IRS and was found a form of tax avoidance that is inappropriate.  TAs should be paid.  I have no problem with that but I do believe in the TA function as mainly an apprentice role.  Much of that is learning by doing.  If your first job after getting the degree involves teaching,  particularly on the tenure track, you should have some prior experience.  Too much is riding on the performance of an assistant professor for it to be otherwise.

I did serve as a grader in an intermediate microeconomics class during my third year.  That was a unique situation as Leon Moses had just move back into the department from being director of the Transportation Center and he got a grader for his teaching as a perq associated with the move.  There were stipulations under the fellowship about not working elsewhere.  Somehow that was accommodated and I got paid for grading.  (Subsequently, Leon and I wrote a couple of papers on the economics of inventories, so this association was far more beneficial to me than just getting money.)  Some of my classmates taught during the third and fourth years in a nighttime program.  That was also for pay.  The idea that advanced graduate students teach independent courses has been with us for some time.  It makes some sense, though I'm not particularly enamored with the practice.  I think of the doctoral student near or at the dissertation stage as a monk-like existence, but then it should be funded well enough for that to be the person's universe.  Teaching to generate income is just as much a tax on the person's time as it is during the first year. 

The last part of the process is going on the job market.  There is no doubt that the preparation we had is for getting a research university level position.  But the market also includes teaching level positions, positions as government agencies such as the Fed, and private sector jobs in consulting firms or large financial institutions.  So there are issues of what makes for a good match between candidate and position.  There are also questions about when to go on the market and what factors determine that.  I was only 25 when I started at Illinois, so one might argue that I should have finished my thesis and tried to get some things published before going on the market.  But I was tired of that monk-like existence and wanted to earn a real salary.  And it did seem like decent jobs were available to me, given what progress I had made and how my dissertation committee saw where I was relative to others on the market, determining the quality of the letters of support they wrote. 

Economics has a two stage process where in the first stage you have interviews at the winter meetings of the ASSA.  These are usually about a half an hour in some hotel room.  That year the meetings were in Atlanta and I had in excess of twenty of these interviews.  Based on the interviews the schools decide which candidates should be invited out for a campus visit (or analog for the other types of jobs I mentioned above).  I made four such visits, then got two offers, which helped a tiny bit in the salary negotiation.  Subsequently, I got a couple of phone calls from places I hadn't interviewed with in Atlanta.  In economics jargon, market clearing takes quite a while.  The top of the market clears first, then on down the line.  More recently there has been some gaming of the market where before the interview stage candidates are invited out to give a paper (an unofficial campus visit).  Those departments further down the line want to get a jump on the market, if they can. 

* * * * *

The above is meant to show there are many different pieces of the puzzle needed to fit together to have a sensible business model for doctoral education.  So far, I've left out perhaps the biggest piece of all.   From where does the revenue come to cover the cost of this education? 

At a private institution like Northwestern there are three possible sources:  gifts from donors, grants from the government or outside foundations, and tuition dollars (from undergraduate students) reallocated to support graduate instruction.  These are to cover the faculty salaries, the salaries of support personnel, the funds to bring in outside speakers and to host conferences, any facilities cost and cost of common infrastructure, and other possible costs. 

At a public institution like Illinois there is a fourth possible source, general tax revenue given to the campus.  In relative terms if not absolute terms the contributions from that fourth source has been declining.  Further, health insurance costs for staff have been on the rise, eating away at much of the state contribution.  Moreover, in many fields, economics is an exemplar, salaries have been growing at a rate faster than the increase in inflation, pretty much for the entire time period since I started.  So the underlying question is whether how the puzzle gets solved should remain the same or if it should change fundamentally because of what is happening on the funding/cost side.

Before trying to get at this question, let me make a few other observations.  I like to think of each discipline as its own ecology.  Positions in aggregate are created by retirements that need to be filled or by growth of the entire discipline that generates fundamentally new positions.  Of course there is also churn - people leave one job and find another.  So the volume one sees in the market has both of these factors in play at the same time.  There is also washout of people from jobs well before the retirement phase.  One thinks, in particular, of folks go don't get tenure.  Thus the severance is involuntary from their point of view.  To the extent that they stay within the sector, but end up at less prestigious places, this is really no different for this observation than the people who get bid away to a job they prefer.  But some of these folks may wash out of the sector entirely pretty much in the same manner as my classmates in the first year of graduate school washed out.  If you ask what business model makes sense, the welfare of those who wash out should be taken into account.

That said, there is a question of whether the discipline does a reasonable job of equating supply and demand in the market.  Note that each graduate program decides on its own how large its doctoral program should be.  There is no central coordination to determine this.  In most markets we think of the "invisible hand" as guiding the market toward equilibrium.  Is something akin to that at work here as well? 

There is the potential for moral hazard to create persistent excess supply.  One source of this is the faculty preference to teach graduate students, given a fixed teaching load, and to have graduate students around to provide assistance with their research.  Note that this preference exists pretty much the same whether the institution is public or private. 

Another source of moral hazard is particularly at play at public institutions, in departments that have large general education offerings or that have many students in the major with large class early offerings there.  Then there is a need for a lot of TAs or some alternative way to staff these large undergraduate classes.  The undergraduate teaching needs then may conflict with the discipline-as-ecology needs.  I note that at Illinois, and I suspect at many public institutions, first year graduate students do TA, provided their English speaking skills are up to par.  Since I became aware of the situation, I have felt this is putting the cart before the horse. More on why follows in a bit.  But let's note first that the faculty preference and the need for TAs are mutually reinforcing.  So in aggregate public institutions are more likely to have larger doctoral programs than they should as compared to private institutions.

Let's also note that in some disciplines there may be chronic excess demand, for quite different reasons.  Potential graduate students have reasonable opportunities elsewhere, with more immediate payoffs and quite possibly higher lifetime earnings.  Fields where I'm aware this has been happening for some time include Computer Science and Accounting.  There may be quite a few other disciplines in this category as well.  The obvious solution in such areas is to hire clinical faculty in significant numbers and to encourage practitioners to embrace a clinical faculty position while in mid career.  But doing this is out of character for a research institution.  Clinical faculty are treated like second class citizens at an R1. 

Further, it is very hard for such an institution to make rules of behavior that differentiate across fields according to whether the field is in equilibrium, excess supply or excess demand, though from the viewpoint of this analysis, that would seem to be necessary.  The rules change only very slowly if at all.  The market conditions can change more rapidly, though as I've noted in some fields the situation persists out of equilibrium for some time. 

* * * * *

In this concluding section I want to take a pass a the quality issue by comparing my experience at Northwestern to that of Illinois.  The issue is how quality interplays with the moral hazards and what if anything should be done about it. 

In Gordon's letter to us back in spring 1976, I believe he had the Northwestern department rated eighth or possibly ninth.  There might have been a little self-promotion in that, but not too much.  Econ was one of the favored departments at Northwestern.  The president of the university at the time, Robert Strotz, was an economist. 

The rankings matter as to where a student applies for grad school.  While other factors might matter as well, presumably the applicant wants to attend the highest ranked program he or she can get into. 

The Illinois Econ department was somewhere in the mid 20's in ranking when I joined it.  But it was also very large at the time, with well over fifty faculty members.  Since some of the rankings are done by total number of pages in journals, weighted by journal quality, the rankings were biased toward large departments.  On an average quality level per faculty member, Illinois was lower than that.  In an event, one might infer simply from the rankings that the quality level of Illinois graduate students in Economics was lower than that of Northwestern.  Of course, there is always the possibility of a diamond in the rough. I have a friend who was an Illinois graduate student when I was a graduate student at Northwestern.  (Actually, he was one year ahead of me.)  He now has an endowed chair at Yale.  But he is the exception that proved the rule. 

My impression on relative graduate student quality was confirmed when in the mid 1980s I started to teach students in the microeconomics core courses.  It was my distinct impression that these students were okay, but not as good as my classmates at Northwestern.  Admittedly, this is a subjective evaluation and it is only a look at these students from the point of view of microeconomics.  Nonetheless, I'm going to take this quality differential across students as a fact. 

So Northwestern has (had) better students and they only TA during the second year.  Illinois has many of its students teaching the entire time in grad school.  Further, while Illinois had a prelim like Northwestern had when I started, it got rid of it around 1990 because it was controversial.  After that there was no process for weeding out students or students self-selecting out like what I experienced my first year in graduate school.  So Illinois was easily turning out more PhDs in Economics than Northwestern was - greater volume and average lower quality.

The only possible rationale for this, in my view, is from considering undergraduate enrollments.  The principles classes are very high enrollment and the economics major tends to be large, quite independent of department ranking.  That teaching must be staffed.  If graduate students are not so relied on then some other method must be found for staffing these courses.   But this is not a pretty picture. 

There is yet another factor to consider here - the role of international students, particularly if those students intend to return to their home country after they get their degree.  Above I tried to consider a discipline as an ecosystem.  If that is a reasonable metaphor one should ask whether the ecosystem is global in scope, continental in scope, or national in scope.  If the ecosystem is national in scope, the international students returning to their home country is akin to students dropping out of the program and pursuing a career in a different field.  Knowing this in advance, why then should such students get an assistantship when they are doctoral students? 

Here is one possible business reason.  The Economics department has a high tuition masters program in policy economics aimed at professional students who get their companies or their governments to pay their tuition.  Most of these students are content with this program as is but some are really there as a gateway to get into the doctoral program.  So that possibility helps in recruiting for the high tuition program.  As such, the business model must consider both programs acting in concert. 

Let me make one more point and then close.  The quality dimension cuts across departments (ecosystems) and at a university like Illinois there will be some departments that raise average quality while others lower it.   One might want the rules to vary by department ranking because of this, but as with the issue of excess supply or excess demand it is very difficult to have rules do this. Further, it raises philosophical questions.   For example, what should be done about a highly ranked department but in a niche field as compared to a moderately rated department but in a core field?

It has been my view for some time, for example see this post on the business and ethical dilemmas of undergraduate education at public R1s, that with inflation-adjusted undergraduate tuition on the rise for in-state students, now on a par to what Northwestern tuition was like when I attended there, that the undergraduate students should command more attention from the research faculty.  I don't see that happening, not yet anyway.  If that did occur then perhaps some of the moral hazard would be mitigated and disciplines producing excess supply of students would come closer into balance.  In most markets resources are directed to be responsive to the revenue source.

Higher Education may be unlike most markets in that it is very traditional in its approach.  The jury is out on whether there will ultimately be a sensible response of if the system will fracture instead because no sensible response is found.  I'm keeping my fingers crossed, but I'm not holding my breath.