Hundred Pockets

Felix Salmon posts his thoughts on whether private schools can really call themselves ‘charities’. Almost all private schools in the UK are registered as charities (saving a them fortune in taxes), but the Charity Commission is showing every willingness to strip them of that status in the near future.

Private schools often claim that they act charitably because they offer scholarships to (smart) children from poor backgrounds.

Private schools were already providing a public benefit [says the head of the Independent Schools Council], by educating children who would otherwise be in state schools paid for by taxpayer

Felix has little sympathy for this argument:

The whines from the head of the Independent Schools Council are not very moving… No one’s asking to abolish private schools, or even proposing that most of them lose their charitable status. They’re just asking that they do a bit more to earn it, which seems right to me.

I’m no class warrior, but Felix is certainly right to be sceptical. Solid economic theory tells us that private schools are emphatically not acting ‘charitably’ when they offer scholarships to poor children. They’re maximising profits.

But surely (you ask) it can’t be profitable to give away expensive school places, free of charge?  Ah, but it can. Dennis Epple and Richard Romano have a classic paper on this in the American Economic Review. Those with a yen for hardcore economic theory can read it in full, but the crux of their reasoning is simply stated:

Schools can charge higher fees to the parents of rich, dumb kids, if they offer free places to smart, poor kids.

Why? Because peer groups matter, and parents know it. So let’s take the rich parents of a spoilt, none-too-smart child (call them, say, Mr. and Mrs. George Bush Senior). Do they want their child to go to a school filled entirely with other rich-but-none-too-bright kids? Absolutely not. They want their child in a class of well-behaved bright sparks (even if a few of them are, regrettably, poor), because a positive classroom environment will (they pray) ’spill over’ into their own child’s grades.

Private schools know what parents want, and so they ‘optimise’ their mix of pupils. It makes perfect sense for them to offer poor-but-smart kids cheap places (even free places), because those children provide positive spillovers which the school can charge rich parents for.

Scholarship exams for top private schools are really a price discovery system: ‘Are you so smart that rich parents will pay to have their kids sit next to you?’ If the answer is yes, then they’ll ‘charitably’ offer you a scholarship. But not because they’re altruistic – rather because they’re  maximising profits.

And don’t let anyone tell you that private schools are  ‘non-profit’ institutions. Non-profits may not distribute dividends to shareholders – but there are always ways to make life more wonderful for their ’stakeholders’ (in particular the staff). Accommodation for teachers, holiday trips, sports centres, even golf courses at some of the UK’s top schools – these are all economic ‘rents’ being shared among the producers. Because they have the money. Because they’re making what would, in any other industry, be called ‘profits’.

So I say ‘more power to Felix’. (Most of Felix’s commenters are not so, um, charitable…) If private schools really wish to be considered charities, then they’ll have to do more than offer places to poor smart kids.

They could start by offering some places to poor failing kids from difficult backgrounds. Now that really would be altruism…

There’s a new blog in town, currently being e-mailed round (despite not having formally launched yet): LeftFootForward. Billed as an evidence-based progressive blog (they draw actual graphs and everything), and seemingly connected to IPPR and Progress, I’m sure they’ll make a fine addition to the UK blogosphere. I’ll add them to the blogroll as soon as I get round to putting in a ‘UK’ section.

Surely the best welcome I can offer, though, is to disagree (respectfully) with one of their posts. Martin McCluskey’s critique of Conservative school policy (’Unaccounted £1bn cost of Tory school reforms‘) makes what I think is a fairly basic mistake.

For the uninitiated: the Tories have proposed new powers for charities, co-ops, non-profit companies and/or parents to set up new schools. Crucially, these schools will be allowed to open even if their area already has ‘enough’ school places. The reasoning is fairly simple – some school places are terrible. Refusing to allow a new school to open – simply because a failing school exists down the road – is not a recipe for driving up standards.

We’ll leave the knotty literature on ‘School Choice’ to one side for now, and focus on Martin’s post. After expressing some (healthy) scepticism about the Swedish school system, which the Tories are using as a model, he makes his big accusation:

In their 2007 paper [Raising the bar, closing the gap], the Tories proposed an extra 220,000 school places (p. 9). Maintaining current levels of funding per child (set at £5,250 for 2010-11) would result in annual costs of £1.2 billion.

These annual costs cannot be covered by the proposed savings of £4.5 billion from the Building Schools for the Future programme (p.39) since this has been earmarked “for the building of New Academies.”

What’s the error here? Martin is confusing school places with children. Schools in the UK system, are funded per pupil, not per place. And while the Tories have proposed 220,000 new school places, they have not proposed 220,000 new children (eye-catching as that would be in any manifesto…)

The Individual Schools Budget received by a school is heavily dependent on the number of pupils enrolled, weighted by their age  (’Age Weighted Pupil Units’ or AWPUs [pronounced oar-poos] in the terrible jargon). Schools get a few dollops of cash for their fixed costs, but empty places (to a first approximation) aren’t funded at all.

So creating 220,000 new places requires a capital budget (to physically build/kit out thousands of new classrooms), but need hardly affect the annual (’recurrent’) cost of funding schools at all – because funding is ‘per-pupil’, and we have the same number of pupils we had before.

The annual £1bn ‘unaccounted cost’ of the post’s title is the result of a misunderstanding.

The second (smaller) error in the paragraph above is the claim that the ‘Building Schools for the Future’ budget (a gigantic pot of cash earmarked for school construction/refurbishment) can’t be used to fund these new places “because this has been earmarked for the building of New Academies”.

Of course, the current Government can earmark its funds for whatever it likes. But an incoming administration can also ignore those earmarks, because under the UK’s unwritten constitution, no Parliament can bind its successor. There may be costs involved in renegotiating already-agreed contracts, but incoming governments are often willing to incur such costs (as some companies are already discovering). And it costs nothing to reshuffle contract-free ‘earmarks’.

So welcome to the Blogosphere, LeftFootForward. I look forward to the conversation.

Megan McArdle has long been sceptical of those sermonizing government ads, begging us to lay off the smoking/drink-driving/over-eating/…

Government coercion has also proven somewhat effective – cigarette taxation and anti-smoking laws have, as far as I can tell, helped cut into smoking quite a bit. But the middle ground, where they just try to persuade us to change our ways… [has] not made any noticeable dent in the behavior they were trying to change. Now, if there were great misapprehension out there about the downsides of being overweight, the government might make a difference . . .  But I don’t think there are a lot of people in America who are under the illusion that being overweight is in any way desireable.

The idea here is that if the government has new information to impart to its citizens, then its campaigns can be effective ( e.g. “From next Monday, we will drive on the other side of the road.”) . But if the government is just moaning (”Thing X, which you already know is bad for you, is, like, reeeaaallly bad for you…”), then its efforts are doomed to failure. Possibly laughable failure – see e.g. Boing Boing’s fabulous compendium of British Public Service Ads.

If Megan is right (and I tend to think she is), then governments are pouring millions of pounds down the toilet every year. Is there anyone left in the UK who doesn’t know that smoking causes cancer? That won’t stop them telling us again. And again.

That said, there’s at least one area where preachy government ads may (may) have made a difference, at least in the UK: drink driving. It has become far, far less socially acceptable to drink and drive in the past twenty years. Even the young and carefree (/moronic) have become more conscientious about it – more conscientious than their parents, in many cases.

I remember working in a restaurant (I was a waiter long before I was an economist) with some otherwise lovely South African staff, some of whom thought drink driving was actually kinda fun. Enjoying a beer after work, the British staff would smile politely through tales of ‘hilarious’ drunken derring-do on the roads of Jo’burg – but with that rictus grin commonly seen at family get-togethers (let’s call it the ‘Oh god, Gran’s about to say something racist’ grimace).

So did the government ads really manage to affect our behaviour?

Or was it a cultural change which would have occurred anyway?

Or should we update John Stuart Mill ‘On Liberty’…?

The only purpose for which adverts can be rightfully screened by governments towards any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not sufficient warrant.

The previous post on cricket auctions reminded me of a glorious post on the Cheap Talk blog, proposing a new set of rules for Scrabble. Instead of choosing letters at random, they bid for them:

The game works roughly as follows.  At the beginning of the game tiles are turned over in sequence and the players bid on them in a fixed order.  The high bidder gets the tile and subtracts his bid from his total score.  (We started with a score of 100 and ruled out going negative, but this was never binding.  An alternative is to start at zero and allow negative scores.)  After all players have 7 tiles the game begins.  In each round, each player takes a turn but does not draw any tiles at the end of his turn.  At the end of the round, tiles are again turned over in sequence and bidding works just as at the beginning until all players have 7 tiles again, and the next round begins.  Apart from this, the rules are essentially the standard scrabble rules.

This awesome proposal allowed them to work out which Scrabble letters are over/under-priced in the standard game:

The way to measure this is to compare the “market” price to the nominal value.  If the market price is higher that means that players are willing to give up more points to get the tile than that tile will give them back when played (ignoring tile-multipliers on the board.)  That means that the nominal score is too high.  For example, blanks have a nominal score of zero.  But the market price of a blank in our play was about 20 points.  This is because blanks are “team players:” very valuable in terms of helping you build words.  So, playing by standard scrabble rules with no bidding, if the value of a blank was to be on equal terms with the value of other tiles, blanks should score negative:  you should have to pay to use them.  Other tiles whose value is out of line:  s (too high, should be negative), u(too low), v(too low.)  On the other hand, the rare letters, like X, J, Z, seem to be reasonably scored.

As fun as this sounds to an econo-geek, it makes me wonder… Is nothing sacred to economists?

(I think you know the answer.)

With England eight wickets away from Ashes victory as I type this (or Australia 400 runs from triumph, depending on how you look at it), this seems a good time to talk about cricket. Specifically, the Undercover Economist’s plan to abolish the pre-match coin toss from cricket, to be replaced with (what else?) an auction.

Both captains would ‘bid’ for the right to decide who bats first – by offering free runs (’bid byes’) to the opposition. Say we use a first price, sealed-bid auction – so each captain writes a number of runs on a scrap of paper, they hand their ‘bids’ to the umpire, and the captain who offered the most runs gets to decide who bats first, while conceding his ‘bid’ runs as a head start to the opposition. Tim Harford is enthusiastic:

The advantage should be auctioned off to whoever is willing to concede the most compensation to the opposition. The idea is absolutely equitable, intrinsically more exciting than a coin toss, and puts the emphasis on the judgment of the captains. Thankfully, since not all coin tosses are equally important – especially in cricket – the auction price reflects conditions on the day.

Is this a good idea? Cricket Burble suspects not:

Maybe people want a bit of luck in their cricket games anyway. An MCC sub-committee considered the auction proposal last year and ‘found no enthusiasm’ – just not cricket apparently.

Presumably we could push this idea even further. Let’s say that after losing the auction, the captain of the fielding team can make another offer to the opposition: we’ll give you another 60 runs (say), in exchange for the wicket of your opening batsman. Or 100 runs for your opening pair. Or 350 runs for your entire team, and we’ll just skip to the next innings.

In fact, we could settle the entire match without a single ball being bowled – just a bit of haggling by both captains and a calculator. And wouldn’t that be a glorious sporting spectacle?

Um… No.

… when you get your first Spam comment.

A moment of true pride. Before I removed it.

Policy Exchange won a fair amount of coverage this week, announcing that the UK private sector has shrunk since 1998. That would be staggering, if true.

In calculations which underline the catastrophic collapse in Britain’s non-public sector economy under Labour, experts have revealed that the private sector will by next year have suffered a “lost decade” of less-than-zero growth.

Fortunately, it isn’t true. David Smith explains why:

The Policy Exchange calculations were based on a popular misconception, that of assuming government spending has risen to around 50% of GDP. Spending may be equivalent to 50% of GDP but that includes transfer payments that are not part of GDP. The G that goes into the national income identity – G + C + I + X – M – is around 20% of GDP (general government spending), plus government capital spending. The public sector has grown too much but it hasn’t crowded out the private sector to quite that extent.

Oops…

In the interests of balance, I should add that Policy Exchange have produced some truly excellent reports on the education system.

But this wasn’t their finest hour.

Chris Dillow at Stumbling and Mumbling draws an interesting chart of life expectancy against health spending in OECD countries. While there appears to be a strong correlation, he makes an important point about what’s driving it:

The strong correlation between health spending and life expectancy exists largely because there are a handful of poor countries (such as Turkey, Poland and Mexico) which spend little on health and have low life expectancy. If we exclude the seven countries in our non-US sample with health spending below 7.5% of GDP, the correlation between spending and life expectancy falls to a statistically insignificant 0.16.

We see something very similar looking at education spending. Take the chart below, showing education spending against maths scores in OECD countries (from the OECD’s gigantic and increasingly misnamed Education At A Glance document)

Spending vs. Maths scores (source: OECD)

There definitely appears to be a positive correlation between spending and achievement. But what if we redraw the chart, leaving out Mexico and Turkey?

Spending vs. maths score, excl. Turkey and Mexico

Positive correlation eliminated. No-one’s saying that spending is completely irrelevant to education outcomes (or health outcomes for that matter). But when politicians and pressure groups clamour for funding increases, it’s worth remembering that money isn’t everything. (And I’m an economist saying that…)

Front page story of yesterday’s Times: Fat, unfit NHS staff top the sick league

More than 45,000 NHS workers call in sick each day — one and a half times the rate of absence seen in the private sector.

The first national audit of staff habits has found that high rates of obesity, smoking, absenteeism and poor mental health are having a direct impact on the quality of patient care.

A large body of evidence suggests that health workers tend to have poor health – mental and physical. It’s well known, for example, that doctors have a startlingly high suicide rate. Many causes are cited, including the stressful nature of the job, the long hours, the life-or-death responsibility.

Here’s the strange thing: in almost every other profession, economists worry about well-informed workers (car mechanics, say, or estate agents) using their superior knowledge for their own personal gain. Steve Levitt (of Freakonomics fame) has a well-known paper showing that estate agents sell their own houses for more than their clients’ (by holding out longer for better offers).

So doctors know more about personal health than just about anyone on the planet. When they get sick, they have a wealth of knowledge about the right tests, scans, treatments – even the ‘best’ specialists to see.  Based on the estate agent example, we’d expect doctors to have fabulous health. And yet that’s not what we see at all…

P.S. Since I’ve linked to Dr. Crippen’s post on suicide among doctors, I should also note that he’s not at all impressed with the report cited by the Times.

Here’s a sentence to set pulses racing: there was interesting news from the Bank of England’s Monetary Policy Committee today. I know. Seriously.

The Governor of the Bank of England, Mervyn King, wanted to pump more money into the UK economy this month but was outvoted by fellow policymakers.

Minutes of the bank’s Monetary Policy Committee (MPC) meeting on 6 August reveal that Mr King wanted £75bn rather than the £50bn that was injected.

Two fellow committee members [Tim Besley and David Miles] also voted for a bigger cash injection.

Outvoted by his own committee? This would never have happened to Alan Greenspan…

I admit to a personal interest – I was lucky enough to be lectured by Tim Besley at LSE, in a course on Political Economics. The introductory lecture was especially memorable – many lecturers try to make these as appealing as possible, to attract more students to their courses (people attend dozens of introductory lectures, then choose just a couple of courses). Not Prof. Besley.

In front of a pretty packed room (at least 40 people) He launched straight into the meat of his course, the overhead projector rapidly filled with algebra as he solved various models step by step. Putting up a particularly long and formidable-looking equation, Prof. Besley casually said ‘… And anyone not confident about solving this expression for the Nash equilibrium probably shouldn’t be doing this course.’

Needless to say, most of the 40 people didn’t come back. Those of us who did, though, ended up learning a huge amount about modern political economics – a field which is (at last) moving the profession away from rather stale arguments about Big-Government-Versus-Small-Government.

On joining the MPC, Prof. Besley rapidly established himself as the hawkiest of inflation hawks – the rate-raising nemesis to David Blanchflower’s Super-Dove. For a long while there were only two safe bets on MPC votes: that David Blanchflower would vote to lower interest rates, and Tim Besley would vote to raise them.

So that’s what’s noteworthy about today’s news. Prof. Besley, a man so hawkish he might as well wear claws to MPC meetings, thinks the UK economy is sufficiently screwed to warrant an extra £25bn in pump-priming.

For the love of God – somebody write the man cheque.

With the sun shining in London, and sporty little cars buzzing round the streets near my office, I was reminded of a peculiar fact about the UK. For years we’ve bought more convertible cars than our Continental friends in France, Italy and Spain:

Despite the weather, British motorists are far more likely to drive convertible cars than their Continental counterparts. Sales of soft-top vehicles in Britain, which are now at about 60,000 a year, are twice as high as in Italy and 10 times higher than in Spain.

Whereas Britons have to make do with an average of 51 days of sunshine each year, the Italians and Spanish enjoy nearly 140 days.

Even the Scots have been getting in on the action:

A total of 7,200 convertibles were sold in Scotland [in 2005], up 20 per cent from 2003.

The increase reflects a UK-wide trend, with British convertible sales outstripping those in many sun-drenched European countries, including Italy, Spain and Portugal.

So what on earth’s going on? It’s hard to believe that a nation so famously obsessed with its own weather is full of car buyers oblivious to the climate. Any explanation is going to need to take account of the fact that luxury cars are both consumption goods (they get you from A to B) and signals (they show how successful/daring/fun-loving you are – or at least, you think they do…)

So here are some possibilities:

1. In a truly hot climate, car buyers want a solid roof and air conditioning. Convertibles are actually perfect for a country where even when it’s sunny, it ain’t always hot.

2. Sunshine is so valuable (because so scarce) to the British, that they will buy cars which are less safe, more tempting for thieves, and less structurally sound – all to be able to feel the precious rays on their heads, even when driving.

3. A convertible signals optimism – about the weather, but also about life more generally.

4. A convertible signals that I am affluent enough to go on holiday (with my car) enough to require a soft top.

5. The sporty convertible hits a romantic soft-spot in the heart of any British car fanatic. We had the Lotus Elan, the MG, and the Mazda MX-5 (alright, the last one’s Japanese – but they did explicitly set out to update the classic British convertible sportscar).

I’m sure there are others. Luckily I’m far too rational, far too well-versed in the dark arts of automobile marketing, to fall for the convertible. Way too rational. Definitely.

Although… The guy who passed me in an MX-5 today did look awfully happy…

So it’s a new blog, it’s my first real post – I figure now’s a good time to tackle the existence of God. (Posts two and three will resolve the Meaning Of Life and World Peace, respectively – then we can pack up the blog and go home.)

The economics profession hasn’t settled the existence of God(s) just yet – but I was struck by this paragraph in the Financial Times yesterday (registration or somesuch awful thing possibly required):

But there may also be economic reasons for the decline in churchgoing [in Poland]. Ditching communism and joining the EU has made Poland wealthier. In 1989 per capita income was about $6,000; last year it was more than $17,000.

“Polish religiousness tends to be based on turning to God to escape distress. When that disappears, so may God,” says Tadeusz Bartos, a theologian.

What model of religion is the FT invoking here? That poor countries are more religious than rich ones? Or poor people…? Surely the United States is a pretty hefty outlier for any theory linking low GDP with high faith in God.

I’m pretty sure the economics of religion boils down to more than “poverty = faith”. Indeed, Robert Barro has a paper which suggests that faith leads to growth. As long as it’s a certain kind of faith:

We find that economic growth responds positively to the extent of religious
beliefs, notably those in hell and heaven, but negatively to church attendance.

And Laurence R. Iannaccone of the Centre for the Economic Study of Religion has long argued against those who assume that religion will just fade away under the glare of modernity. (Many of those people are economists…)

Still, I guess what surprised me about that quote in the FT (”When distress disappears, so may God,”) wasn’t the sentiment, so much as the profession of the speaker. I’m sure lots of smart people believe the poverty = faith meme. But a theologian…?

… and welcome to Hundred Pockets. I’m sure we won’t be short of things to talk about.

A recession (you may have heard), an election (soon), a 150 million year old squid you can use as a fountain pen – it’s a big, wide, wonderful world. So let’s get cracking…