I have just taught the theory of the supply curve at the principles level for the umpteenth time, and my conscience is in open rebellion. This business with the horizontal demand curve and setting supply equal to marginal costs is simply rubbish; it denies some of the most important, and obvious, facts about how capitalism actually works.
At the level of an individual firm, the theory obscures what ought to be the starting point for analysis—that in a capitalist economy the normal state of affairs is that firms set production at a level that requires them to chase consumers any way they can, and that the usual result is that some offerings go unsold. Across the entire economy the level of activity is nearly always demand-constrained, not supply-constrained.
Consider the relationship between buyers and sellers at the level of individual enterprises. From observers like Alec Nove and Janos Kornai, we have come to recognize that the prevalence of buyers’ markets is what distinguishes capitalism; in the state-managed systems of pre-1989 socialism, the seller was king. This suggests that excess supply is the most likely state of affairs, excess demand the least likely. An exact equality between demand and supply at the market-determined price is essentially impossible.
Of course, demand is not determinant. It is best represented as a subjective frequency distribution, to which sellers would adjust their production plans. Suppose, to keep things simple, this is a normal distribution. (I don’t think this assumption changes anything important.) Suppose also that marginal costs are symmetric around the mean of expected demand—that the increase of MC for one unit more is equal to its decrease for one unit less. This equalizes the direct financial cost of over- and underproduction, another convenience for our analysis. (If MC increases at an increasing rate, incidentally, this would be a reason for a bias toward underproduction, and therefore excess demand, ceteris paribus; so it’s not the answer we’re looking for.) Now let the seller maximize profit by making an ex ante decision about how much to supply for this uncertain demand.
What we would expect to see is an equal incidence of ex post excess demand and excess supply. But this is not how it is.
Let’s add a couple of new elements: first, suppose that consumers are not utility maximizers, gathering all information about product quality, prices and suppliers costlessly and then making the optimal purchase, but satisficers. They have benchmark price and quality points, and they select the first seller who meets them. Second, consider a sequential model where, in each period, consumers begin their search with the seller they transacted with in the previous period, so, if the seller continues to meet the buyers’ price and quality points, the customer is still theirs. This fits with the literature in marketing, which stresses that a sale should always be seen as the opening to future sales and therefore worth a much greater investment than it would justify from a myopic perspective.
This new element has the effect of biasing the seller’s choice of a production level: it is more expensive to lose out on a sale than to produce or stock an extra item for which there is no ex post demand. Producers in general set their output to the right of the mean of expected demand, and excess supply is the norm.
This is not quite eureka. It works for the special case of constant variable costs, but there is more work to do to incorporate upward-sloping MC and the effect that raising the selling price (due to being further out on the MC curve) has on the proportion of consumers (whose price benchmarks are also stochastic) who will continue to satisfice. What we get, in the end, is a case for generalized excess supply that depends on the relationship between the parameters governing the two forms of uncertainty—the size of the market (the number of desired purchases) and the market share for any single firm (the proportion of buyers who regard a particular selling price as acceptable)—as well as the seller’s marginal cost structure. For further complication one can also relax the assumption that buyers always return if their satisficing conditions are met; this probability could also be governed by a parameter. (Note that one useful result of this model is that it relaxes the so-called law of one price in a way that is consistent with real-world data.)
Such a model would provide microfoundations for demand-constrained macroeconomics. Working this out is of less interest to me, but it should be clear that there is a certain amount of equilibrium slack in such a system. What would the dynamics look like, however? Would chronic excess-suppliers of this sort respond differently to aggregate demand shocks, compared to the Walrasian firms that populate existing general equilibrium models?
During the next two years economists (at least those in the US) will be freed from having to think about policy and can shift their attention to the theoretical foundations of their discipline.
Thursday, November 4, 2010
Tuesday, November 2, 2010
One Person's Green Infrastructure Is Another's "High Speed Pork"
"High Speed Pork" is the heading on a column in yesterday's WaPo by the non-economist economics commentator Robert J. Samuelson, who is not related to Paul A. Samuelson or even the game theorist Larry Samuelson. He has decided that high speed rail projects in the US are not worth the money and should be cancelled. Drawing on a Congressional Research Service study, he argues that even the most beneficial of the 12 under consideration, between LA and SF in CA, is not worth it in terms of diverting either air or auto traffic, with the real problem of auto traffic being commuting, according to him, although it occurs to me that in the future such lines might also be used for freight, thus possibly taking some of the burden of trucking. He also argues that the green externalities are trivial, and that the only foreign lines making money are Tokyo-Osaka and Paris-Lyon.
My guess is that overly high discount rates are being used for these calculations. I see many other countries building these, including China and into areas not all that heavily populated, and I see oil prices and externality costs rising in the future. I think investing in these projects is a good idea for the long term, with the US behaving abysmally shortsightedly on these matters, egged on by bozo RJS.
At a personal level an old friend of mine in Wisconsin has been heading up the effort to build these there for a long time, starting under Republican Governor Tommy Thompson and going through the past 8 years of Dem Governor Jim Doyle. A likely outcome of today's election is that all this is going to go down to waste as the likely GOP winner, Scott Walker, has declared his total opposition to these projects. So, adios to this, although they did manage to get a line built between Chicago and Milwaukee. But I fear a lot more of this cancelling in the future is going to go down in the next couple of years as a result of today's election.
My guess is that overly high discount rates are being used for these calculations. I see many other countries building these, including China and into areas not all that heavily populated, and I see oil prices and externality costs rising in the future. I think investing in these projects is a good idea for the long term, with the US behaving abysmally shortsightedly on these matters, egged on by bozo RJS.
At a personal level an old friend of mine in Wisconsin has been heading up the effort to build these there for a long time, starting under Republican Governor Tommy Thompson and going through the past 8 years of Dem Governor Jim Doyle. A likely outcome of today's election is that all this is going to go down to waste as the likely GOP winner, Scott Walker, has declared his total opposition to these projects. So, adios to this, although they did manage to get a line built between Chicago and Milwaukee. But I fear a lot more of this cancelling in the future is going to go down in the next couple of years as a result of today's election.
Friday, October 29, 2010
Why Capitalism Cannot be Tamed
A little more than a year ago, I posted a note using football as a metaphor for the futility of effective regulation.
http://michaelperelman.wordpress.com/2009/09/13/the-futility-of-financial-regulation-lessons-from-science-and-professional-football/
Some people dismissed the football metaphor. The Wall Street Journal today has a story about how people design new psychotropic drugs to get around regulation. It may be that these new drugs are more dangerous than banned drugs. In all likelihood, they can design these drugs faster than the government can make regulations.
How in the world can regulators get ahead of financial industry or tax lawyers, even if the lobbyists were not writing the regulations or the tax codes.
Whalen, Jeanne. 2010. "In Quest for 'Legal High,' Chemists Outfox Law." Wall Street Journal (30 October).
http://online.wsj.com/article/SB10001424052748704763904575550200845267526.html?mod=WSJ_World_LeadStory
http://michaelperelman.wordpress.com/2009/09/13/the-futility-of-financial-regulation-lessons-from-science-and-professional-football/
Some people dismissed the football metaphor. The Wall Street Journal today has a story about how people design new psychotropic drugs to get around regulation. It may be that these new drugs are more dangerous than banned drugs. In all likelihood, they can design these drugs faster than the government can make regulations.
How in the world can regulators get ahead of financial industry or tax lawyers, even if the lobbyists were not writing the regulations or the tax codes.
Whalen, Jeanne. 2010. "In Quest for 'Legal High,' Chemists Outfox Law." Wall Street Journal (30 October).
http://online.wsj.com/article/SB10001424052748704763904575550200845267526.html?mod=WSJ_World_LeadStory
Thursday, October 28, 2010
This Is What Accounting Identities Look Like
I have been periodically raging against the ignorance of those who would slash fiscal deficits without regard to fundamental accounting identities. Such “serious” people somehow think that public and private debt levels can be lowered simultaneously, without a substitution of foreign assets in domestic portfolios (a current account surplus). It does not occur to them that one person’s debt is another’s asset—too confusing, I guess.
What this means is that, if the private sector is collectively paying down its debts, and the government tries to pare its deficits at the same time, either there is an increase in net exports to finance all of this, or it just doesn’t happen. That’s how it is with identities. Unlike other kinds of rules, they are not made to be broken.
Which brings us to this morning’s news about public finances in Europe: despite the earnest efforts of the austerians, fiscal deficits are not declining. Rather, tax receipts are going down, so that the ex post identities remain in force. As long as the private sector continues to deleverage, further efforts to produce “responsible” fiscal deficits will just lead to lower tax revenues and further spending cuts, in a downward spiral of pointless misery.
It reminds me of a bumper sticker that was popular a few decades ago: “Gravity. Not just a good idea—it’s the law.”
What this means is that, if the private sector is collectively paying down its debts, and the government tries to pare its deficits at the same time, either there is an increase in net exports to finance all of this, or it just doesn’t happen. That’s how it is with identities. Unlike other kinds of rules, they are not made to be broken.
Which brings us to this morning’s news about public finances in Europe: despite the earnest efforts of the austerians, fiscal deficits are not declining. Rather, tax receipts are going down, so that the ex post identities remain in force. As long as the private sector continues to deleverage, further efforts to produce “responsible” fiscal deficits will just lead to lower tax revenues and further spending cuts, in a downward spiral of pointless misery.
It reminds me of a bumper sticker that was popular a few decades ago: “Gravity. Not just a good idea—it’s the law.”
You Wouldn’t Know that Banking Is a Business
I was glumly reading this morning’s New York Times article about Spain, where bankruptcy law holds borrowers fully liable for their outstanding mortgage principle (plus interest and legal costs) even after their properties are foreclosed, when I came across this striking paragraph:
So like the US, where Obama has refused to impose a foreclosure moratorium, despite massive fraud, in order to shore up the banking system. After all, we need these banks to remain sound and solvent if we are to emerge from the financial crisis, right?
Just one thing, though: aren’t the banks private, profit-making businesses? What is the implication for the rational allocation of resources, not to mention social justice, of ginning the rules so that one industry can enjoy greater profits at the expense of everyone else? And we’re not talking about struggling startups here: financial profits have simply metastasized in the 00s, driving income inequality and rewarding the very activities that put modern economies at extreme risk.
If banks truly are public utilities, providing an indispensable service that requires frequent infusions of public support—subsidies, bailouts, favorable regulatory dispensations—they should be publicly owned. No risk, no profit.
Several opposition parties in Parliament have been pressing for amendments to the country’s foreclosure laws, including letting mortgage defaulters settle their debts with the bank by turning over the property. But the government of José Luis Rodríguez Zapatero has opposed such a major change in lending practices. Government officials say Spain’s system of personal guarantees saved its banks from the turmoil seen in the United States.
So like the US, where Obama has refused to impose a foreclosure moratorium, despite massive fraud, in order to shore up the banking system. After all, we need these banks to remain sound and solvent if we are to emerge from the financial crisis, right?
Just one thing, though: aren’t the banks private, profit-making businesses? What is the implication for the rational allocation of resources, not to mention social justice, of ginning the rules so that one industry can enjoy greater profits at the expense of everyone else? And we’re not talking about struggling startups here: financial profits have simply metastasized in the 00s, driving income inequality and rewarding the very activities that put modern economies at extreme risk.
If banks truly are public utilities, providing an indispensable service that requires frequent infusions of public support—subsidies, bailouts, favorable regulatory dispensations—they should be publicly owned. No risk, no profit.
Wednesday, October 27, 2010
Deleterious Doodling About The Deficit: What Else Is New? Department
In today's Washington Post business section, Lori Montgomery has a big article on "A renewed focus on spending," starting with how the GOP is making noises about cutting spending to cut the deficit without raising taxes, while not mentioning anything too serious, although Boehner supposedly might be open to cutting some loopholes in the tax code, thereby de facto raising taxes, if Grover Norquist will let him (assuming as most think that the GOP will take control of the House after next week's election), and if anybody thinks elimination of the tax deduction for mortgage interest is remotely on the table in a period with a terrible housing market, there is a bridge in Brooklyn for sale to them. Then most of the article lugubriously goes on about all the efforts at supposed bipartisanship on the Deficit Commission.
Yet again, we read about all this agreement to "stabilize social security finances" by raising future retirement ages, because "The current Social Security program will not survive based on upon current rules." Well, beating a drum beaten often here, this latter is so much baloney. However, the rest of it is even worse. We get scare stories about the deficit of the last two years, when about half of this is due to the recession and the rapidly disappearing stimulus package, while the other half is due to the Bush tax cuts and increased defense spending due to wars in Iraq and Afghanistan, which will hopefully wind down in the not too distant future.
Raising future retirement ages does a great big doodley-squat nothing about any near term deficit, although Lori Montgomery and other reporters somehow fail to point this out in their so-called reporting. So, we suffer from an ongoing deterioration of discourse on this subject as the same old groups and politicians push the same old nonsense formuli for solving a problem that will hopefully mostly take care of itself, with almost no offsetting commentary, although undoing the tax cut part of the deficit is not going to happen if the GOP takes over the House.
Yet again, we read about all this agreement to "stabilize social security finances" by raising future retirement ages, because "The current Social Security program will not survive based on upon current rules." Well, beating a drum beaten often here, this latter is so much baloney. However, the rest of it is even worse. We get scare stories about the deficit of the last two years, when about half of this is due to the recession and the rapidly disappearing stimulus package, while the other half is due to the Bush tax cuts and increased defense spending due to wars in Iraq and Afghanistan, which will hopefully wind down in the not too distant future.
Raising future retirement ages does a great big doodley-squat nothing about any near term deficit, although Lori Montgomery and other reporters somehow fail to point this out in their so-called reporting. So, we suffer from an ongoing deterioration of discourse on this subject as the same old groups and politicians push the same old nonsense formuli for solving a problem that will hopefully mostly take care of itself, with almost no offsetting commentary, although undoing the tax cut part of the deficit is not going to happen if the GOP takes over the House.
French Pension “Reform” and the Life Expectancy Canard
Angela Doland reports on a bill passed by the French parliament:
I am not an expert on the French retirement benefits debate but this claim sounds like a canard that proponents of Social Security benefit cuts in the US have often made. If life expectancy is longer because fewer children die prematurely, then it has little to do with the solvency of any retirement benefit program. The issue at hand should be the remaining life expectancy when people reach age 60.
France's parliament granted final approval Wednesday to a bill raising the retirement age from 60 to 62, a reform that has infuriated the country's powerful unions and touched off weeks of protests and strikes. The 336-233 vote in the National Assembly was a victory for conservative President Nicolas Sarkozy, who has stood firm despite the protests - a stance that has resulted in his lowest approval ratings since he took office in 2007 … Unions see retirement at 60 as a cornerstone of France's generous social benefit system, but the conservative government says the entire pension system is in jeopardy without the reform because French people now have longer lifespans - an average of nearly 85 years for women and 78 for men, according to newly released figures from statistics agency Insee.
I am not an expert on the French retirement benefits debate but this claim sounds like a canard that proponents of Social Security benefit cuts in the US have often made. If life expectancy is longer because fewer children die prematurely, then it has little to do with the solvency of any retirement benefit program. The issue at hand should be the remaining life expectancy when people reach age 60.
Monday, October 25, 2010
The url's for my videos
A friend asked if I would collect the urls for my videos. Here they are, beginning with the most recent.
http://www.youtube.com/watch?v=8PsurH6pxQg
http://www.youtube.com/watch?v=6h9xpmM14BU
http://www.youtube.com/watch?v=3w6hRP6oiYE
http://www.youtube.com/watch?v=h8blnkRNq2A
http://www.youtube.com/watch?v=2hNt_qc-RvM
http://www.ustream.tv/recorded/8702391http://www.ustream.tv/recorded/8850114
http://www.youtube.com/watch?v=8PsurH6pxQg
http://www.youtube.com/watch?v=6h9xpmM14BU
http://www.youtube.com/watch?v=3w6hRP6oiYE
http://www.youtube.com/watch?v=h8blnkRNq2A
http://www.youtube.com/watch?v=2hNt_qc-RvM
http://www.ustream.tv/recorded/8702391http://www.ustream.tv/recorded/8850114
Sunday, October 24, 2010
The Ironies of the Commodity: My New Video
I just posted a new video regarding the ironies of the commodity, taking up from the respective analysis of Marx and Smith and the behavior of business.
http://www.youtube.com/watch?v=8PsurH6pxQg
http://www.youtube.com/watch?v=8PsurH6pxQg
Privatized Education Ripoff in the Homeless Shelters
Golden, Daniel. 2010. “The Homeless at College.” Bloomberg Business Week (30 April).
Here is how the article begins:
“Benson Rollins wants a college degree. The unemployed high school dropout who attends Alcoholics Anonymous and has been homeless for 10 months is being courted by the University of Phoenix. Two of its recruiters got themselves invited to a Cleveland shelter last October and pitched the advantages of going to the country’s largest for-profit college to 70 destitute men.”
“Their visit spurred the 23-year-old Rollins to fill out an online form expressing interest. Phoenix salespeople then barraged him with phone calls and e-mails, urging a tour of its Cleveland campus. “If higher education is important to you for professional growth, and to achieve your academic goals, why wait any longer? Classes start soon and space is limited,” one Phoenix employee e-mailed him on Apr. 15. “I’ll be happy to walk you through the entire application process”.”
“Rollins’ experience is increasingly common. The boom in for-profit education, driven by a political consensus that all Americans need more than a high school diploma, has intensified efforts to recruit the homeless. Such disadvantaged students are desirable because they qualify for federal grants and loans, which are largely responsible for the prosperity of for-profit colleges. Federal aid to students at for-profit colleges jumped from $4.6 billion in 2000 to $26.5 billion in 2009. Publicly traded higher education companies derive three-fourths of their revenue from federal funds, with Phoenix at 86%, up from just 48% in 2001 and approaching the 90% limit set by federal law.”
It gets worse:
Read More at:
Golden, Daniel. 2010. “The Homeless at College.” Bloomberg Business Week (30 April).
http://www.businessweek.com/magazine/content/10_19/b4177064219731.htm?chan=magazine+channel_features
Here is how the article begins:
“Benson Rollins wants a college degree. The unemployed high school dropout who attends Alcoholics Anonymous and has been homeless for 10 months is being courted by the University of Phoenix. Two of its recruiters got themselves invited to a Cleveland shelter last October and pitched the advantages of going to the country’s largest for-profit college to 70 destitute men.”
“Their visit spurred the 23-year-old Rollins to fill out an online form expressing interest. Phoenix salespeople then barraged him with phone calls and e-mails, urging a tour of its Cleveland campus. “If higher education is important to you for professional growth, and to achieve your academic goals, why wait any longer? Classes start soon and space is limited,” one Phoenix employee e-mailed him on Apr. 15. “I’ll be happy to walk you through the entire application process”.”
“Rollins’ experience is increasingly common. The boom in for-profit education, driven by a political consensus that all Americans need more than a high school diploma, has intensified efforts to recruit the homeless. Such disadvantaged students are desirable because they qualify for federal grants and loans, which are largely responsible for the prosperity of for-profit colleges. Federal aid to students at for-profit colleges jumped from $4.6 billion in 2000 to $26.5 billion in 2009. Publicly traded higher education companies derive three-fourths of their revenue from federal funds, with Phoenix at 86%, up from just 48% in 2001 and approaching the 90% limit set by federal law.”
It gets worse:
Read More at:
Golden, Daniel. 2010. “The Homeless at College.” Bloomberg Business Week (30 April).
http://www.businessweek.com/magazine/content/10_19/b4177064219731.htm?chan=magazine+channel_features
Saturday, October 23, 2010
Do No Evil: Pay No Taxes
Bloomberg has an excellent article describing how Google saves billions in taxes. Besides showing how Google constructs its international network of tax dodges (similar to what other high-tech companies use), the article discusses how taxes helped to create the company and how the federal government gave its blessing to the Google racket. I assume that I will also see the article tomorrow when my BusinessWeek arrives.
The article has too much in it to cull snippets. Here is the source so that you can read it for yourself:
Drucker, Jesse. 2010."Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes." Bloomberg (21 October).
http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html
The article has too much in it to cull snippets. Here is the source so that you can read it for yourself:
Drucker, Jesse. 2010."Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes." Bloomberg (21 October).
http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html
Friday, October 22, 2010
A Very Small Step
The 4% solution proposed by Tim Geithner—countries should try to keep their current account surpluses or deficits within 4% of their GDP—offers the glimmer of a beginning of a first step toward rectifying global imbalances. In its own terms, the proposal is largely empty: it is strictly advisory, and it doesn’t specify how the goal is to be achieved. Nevertheless, I feel a little twinge of optimism. Something is beginning to stir.
Global imbalances have been a threat to economic stability for decades, going back at least to the 1970s. We had a crisis in 1982, and then another in the late 90s, and now the current crunch, all attributable to the absence of any institutional or structural force capable of keeping trade and capital flow imbalances within reasonable limits. The scramble for unconstrained external surpluses, or to avoid unconstrained external deficits, has resurrected mercantilism as a dominant philosophy of development, and it exerts intense downward pressure on environmental and social standards. (This pressure shows up as a failure to raise standards as much or more than as a propensity to weaken them.) It’s a central problem that cries out for a solution.
The benchmark isn’t it, but it at least puts the question on the table. Perhaps the realization will dawn that a modification of the international economic architecture to keep imbalances within limits is worth some effort. How this could be implemented is a topic for investigation and debate: how much can we rely on automatic exchange rate triggers, capital control safety valves or tradeable import quotas? How to get the most stability with the least distortion? The bland suggestions in Geithner’s message (“increase/decrease your savings rate”) have little to offer in this respect.
Economists don’t have to wait for the politicians to lead; they can begin thinking now about how to construct mechanisms that can keep imbalances within safe limits.
Global imbalances have been a threat to economic stability for decades, going back at least to the 1970s. We had a crisis in 1982, and then another in the late 90s, and now the current crunch, all attributable to the absence of any institutional or structural force capable of keeping trade and capital flow imbalances within reasonable limits. The scramble for unconstrained external surpluses, or to avoid unconstrained external deficits, has resurrected mercantilism as a dominant philosophy of development, and it exerts intense downward pressure on environmental and social standards. (This pressure shows up as a failure to raise standards as much or more than as a propensity to weaken them.) It’s a central problem that cries out for a solution.
The benchmark isn’t it, but it at least puts the question on the table. Perhaps the realization will dawn that a modification of the international economic architecture to keep imbalances within limits is worth some effort. How this could be implemented is a topic for investigation and debate: how much can we rely on automatic exchange rate triggers, capital control safety valves or tradeable import quotas? How to get the most stability with the least distortion? The bland suggestions in Geithner’s message (“increase/decrease your savings rate”) have little to offer in this respect.
Economists don’t have to wait for the politicians to lead; they can begin thinking now about how to construct mechanisms that can keep imbalances within safe limits.
Thursday, October 21, 2010
Denial on Two Fronts, Climate and Keynes
This morning’s New York Times, without any apparent irony, gives us two front page stories in which science and empiricism are rejected in the name of political ideology. One, the refusal of Tea Partiers to accept climate change, is treated with humor and a whiff of incredulity; the other, the rejection of any coherent macroeconomics on the part euro-austerians, is offered with more respect.
Take the first case. Candidates and activists marching under the Tea Party flag are quoted as saying that climate change is unproved, a hoax perpetrated by those who want to impose global socialism. The religious angle is played up:
The final word is given to another founder of a local Tea Party organization:
Yes, God is like the tooth fairy, leaving oil and coal under our pillow as an expression of pure love. God especially loves the Saudis. (I’ll bet that, if this woman ever gets cancer, she will say that God is testing her. Maybe God is testing the human race by giving us an environmental “disease” that can be cured only by self-restraint. Don’t quote me on this.)
Meanwhile, a few inches north in column five, we are told about the wholesale rejection of Keynesian demand management by European political leaders. For them, the problem is budget deficits, not unemployment or stagnant economies. England’s budget, due to be slashed by almost 20% by the new ToryLib government, is described as “bloated”. A few “liberal” economists, like Brad DeLong and Joe Stiglitz, are left to wail in the wilderness.
What is missing from the economic story, however, is any recognition that there are accounting identities that define reality for all economies, whatever their political leaders may want to believe. The one that matters right now is that the change in net private debt plus the change in public debt plus the surplus on the current account must sum to zero. Austerians who are keen to reduce fiscal deficits must believe that this will be counterbalanced by either less deficit reduction by the private sector or by a big increase in net exports by everyone, all at once (in our trade with Mars, I guess). In other words, holding the trade balance constant, you can’t get net debt reduction in one part of the economy (banks and households) without permitting more debt somewhere else (government). This isn’t about Keynes, it’s about the iron grip of arithmetic on the realm of the possible.
Which means that the fiscal Kool-Aid conservative governments in Europe are gulping down these days has a lot of tea mixed in.
Take the first case. Candidates and activists marching under the Tea Party flag are quoted as saying that climate change is unproved, a hoax perpetrated by those who want to impose global socialism. The religious angle is played up:
“It’s a flat-out lie,” Mr. Dennison [a Tea Party activist in Indiana] said in an interview after the debate, adding that he had based his view on the preaching of Rush Limbaugh and the teaching of Scripture.
The final word is given to another founder of a local Tea Party organization:
“Being a strong Christian,” she added, “I cannot help but believe the Lord placed a lot of minerals in our country and it’s not there to destroy us.”
Yes, God is like the tooth fairy, leaving oil and coal under our pillow as an expression of pure love. God especially loves the Saudis. (I’ll bet that, if this woman ever gets cancer, she will say that God is testing her. Maybe God is testing the human race by giving us an environmental “disease” that can be cured only by self-restraint. Don’t quote me on this.)
Meanwhile, a few inches north in column five, we are told about the wholesale rejection of Keynesian demand management by European political leaders. For them, the problem is budget deficits, not unemployment or stagnant economies. England’s budget, due to be slashed by almost 20% by the new ToryLib government, is described as “bloated”. A few “liberal” economists, like Brad DeLong and Joe Stiglitz, are left to wail in the wilderness.
What is missing from the economic story, however, is any recognition that there are accounting identities that define reality for all economies, whatever their political leaders may want to believe. The one that matters right now is that the change in net private debt plus the change in public debt plus the surplus on the current account must sum to zero. Austerians who are keen to reduce fiscal deficits must believe that this will be counterbalanced by either less deficit reduction by the private sector or by a big increase in net exports by everyone, all at once (in our trade with Mars, I guess). In other words, holding the trade balance constant, you can’t get net debt reduction in one part of the economy (banks and households) without permitting more debt somewhere else (government). This isn’t about Keynes, it’s about the iron grip of arithmetic on the realm of the possible.
Which means that the fiscal Kool-Aid conservative governments in Europe are gulping down these days has a lot of tea mixed in.
Tuesday, October 19, 2010
In Memory of Benoit Mandelbrot
I would have posted on the death of mathematician Benoit Mandelbrot on October 14 sooner, but my mother died on Oct. 8, and I have been completely absorbed with that until now (she is buried and all that).
Anyway, I think he was enormously important and deserved the Nobel Prize in economics. While one can see it implicit in not empirically sound work of Pareto in the 1890s and in Lotka and Zipf on city size distributions in the 1940s, it was Mandelbrot writing on cotton prices in the early 1960s who first recognized the phenomenon of fat tails in asset markets, which are ubiquitous in fact, and also linked these with the concept of fractals and fractal dimensionality, which has since become enormously influential and widespread across many disciplines, although the first fractal set was the Cantor Set, discovered by Georg Cantor in 1883.
I met Mandelbrot on several occasions and found him to be enormously impressive. He did have an enormous ego (and also the largest head I ever saw on anybody), but he was one of those people who had some grounds for his egotism. As most probably know, his career was very unconventional, and he was only offered an academic position when he was quite old (a special professorship at Yale), after he worked for many years at IBM.
In terms of current issues and debates, Mandelbrot was one of those along with Taleb who was warning for some time that we were likely to have a major crash of the financial system. More recently, John Cochrane invoked him in an effort to defend the Chicago School people from charges that their conventional financial market models that assume Gaussian normal distributions were partly responsible for the problems were not all that they believed. He pointed out that his father-in-law, Eugene Fama, had once been a follower of Mandelbrot, and therefore anyone who studied with Fama knew about fat tails, although Fama had fallen out with Mandelbrot over a technical issue (do variances vanish asymptotically; Fama was right that they do not but then dropped the ball by failing to notice that fourth moments, kurtosis, that is fat tails, do appear to vanish that way, making Mandelbrot right in the big picture).
Of course, when I went to look at Cochrane's big grad textbook, Asset Pricing, fat tails, kurtosis, and so on, much less fractals or power law distributions. do not appear in it at all. So, maybe Cochrane knew about fat tails, but he was not about to let anybody else know about them.
In any case, I think Mandelbrot was one of the few genuine geniuses writing about economics, although it was not his primary field of interest. His death is a great loss.
Anyway, I think he was enormously important and deserved the Nobel Prize in economics. While one can see it implicit in not empirically sound work of Pareto in the 1890s and in Lotka and Zipf on city size distributions in the 1940s, it was Mandelbrot writing on cotton prices in the early 1960s who first recognized the phenomenon of fat tails in asset markets, which are ubiquitous in fact, and also linked these with the concept of fractals and fractal dimensionality, which has since become enormously influential and widespread across many disciplines, although the first fractal set was the Cantor Set, discovered by Georg Cantor in 1883.
I met Mandelbrot on several occasions and found him to be enormously impressive. He did have an enormous ego (and also the largest head I ever saw on anybody), but he was one of those people who had some grounds for his egotism. As most probably know, his career was very unconventional, and he was only offered an academic position when he was quite old (a special professorship at Yale), after he worked for many years at IBM.
In terms of current issues and debates, Mandelbrot was one of those along with Taleb who was warning for some time that we were likely to have a major crash of the financial system. More recently, John Cochrane invoked him in an effort to defend the Chicago School people from charges that their conventional financial market models that assume Gaussian normal distributions were partly responsible for the problems were not all that they believed. He pointed out that his father-in-law, Eugene Fama, had once been a follower of Mandelbrot, and therefore anyone who studied with Fama knew about fat tails, although Fama had fallen out with Mandelbrot over a technical issue (do variances vanish asymptotically; Fama was right that they do not but then dropped the ball by failing to notice that fourth moments, kurtosis, that is fat tails, do appear to vanish that way, making Mandelbrot right in the big picture).
Of course, when I went to look at Cochrane's big grad textbook, Asset Pricing, fat tails, kurtosis, and so on, much less fractals or power law distributions. do not appear in it at all. So, maybe Cochrane knew about fat tails, but he was not about to let anybody else know about them.
In any case, I think Mandelbrot was one of the few genuine geniuses writing about economics, although it was not his primary field of interest. His death is a great loss.
Sunday, October 17, 2010
Privatized Education Fraud: Stripping to Pay Tuition
Bloomberg Businessweek has done a good job of tracking the scandal of privatized colleges. I will post another piece in which the magazine describes these "colleges" peddling education in homeless shelters, knowing that the Feds will cover the inevitable defaults.
Hechinger, John. 2010. "What's This Degree Worth?" Bloomberg Businessweek (9 August): pp. 66-69.
"Like many investors, Goldman, owner of 38 percent of the Art Institute's parent, Education Management Corp. was drawn to for-profit colleges by their rapid growth and soaring stock prices. Now Goldman, which recently agreed to pay $550 million to settle U.S. civil-fraud charges related to the subprime mortgage meltdown, is invested in an industry under attack from Congress, the Obama Administration, and dissatisfied students. This week the Senate held a hearing featuring a Government Accountability Office undercover probe that found recruiters at EDMC's Argosy University in Chicago and 14 other for-profit colleges misled investigators posing as potential students about the cost and quality of their programs. Near their peak in April, Goldman's shares in EDMC were worth $1.39 billion. Since then they've fallen by 42 percent, to about $800 million."
"A proposed government crackdown could have a disproportionate effect on EDMC. The U.S. Education Dept. could restrict taxpayer-funded grants and loans to for-profit colleges like EDMC that offer $50,000 associate's and $100,000 bachelor's degrees in such low-paying fields as cooking, art, and design. Until recently the education business looked like a bonanza for Goldman. Pittsburgh-based EDMC, the second-largest U.S. chain of for-profit colleges after Apollo Group's (APOL) University of Phoenix, has 136,000 students -- more than three times as many as the University of Michigan. Its annual revenue doubled over the last five years, to $2.4 billion. Goldman and two other firms bought EDMC in 2006 and took it public in 2009. Along the way they shared at least $70 million in advisory, management, and other fees, according to securities filings. Goldman also became EDMC's biggest stockholder."
"Government grants and loans to students, combined with booming enrollment, have made for-profit colleges a rewarding investment. Federal aid to for-profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 2000, according to the Education Dept. EDMC currently receives almost 82 percent of its revenue from federal financial aid programs."
"On July 23, the Obama Administration proposed restricting -- and in extreme cases, cutting off entirely -- programs whose graduates end up with the highest debts relative to their salaries and have the most trouble repaying their student loans. EDMC will be affected more than most other for-profit companies because of its focus on "passion" fields, such as art and cooking, rather than more practical accounting or business degrees, says Jeffrey M. Silber, an analyst with BMO Capital Markets in New York. Cooking, fashion, and arts jobs tend to have low starting salaries: A beginning cook, for example, earns an average of $18,000 a year, according to U.S. Bureau of Labor Statistics data, while a two-year culinary degree can cost $40,000 to $50,000. EDMC spokeswoman Jacquelyn P. Muller says Art Institute students tend to earn more, with those holding culinary degrees starting at $28,000."
"EDMC also faces complaints from its own graduates and employees. A lawsuit filed in Texas state court by 18 students alleges they were misled about the accreditation status of their program, diminishing their degrees' value and leaving them with debts they can't repay. In another suit a former admissions officer claims the company engaged in high-pressure sales tactics, paying staff to sign up students. In July, dozens of faculty who tried, unsuccessfully, to form a union at one Art Institute campus complained that unqualified students were being let into their classes.
"Like some of its students, EDMC has substantial debt. In 2006, Goldman Sachs, Providence Equity Partners, and Leeds Equity Partners borrowed $2 billion when the group purchased the company for $3.4 billion, taking it private in a leveraged buyout. Goldman, which made the investment through GS Capital Partners, a" private-equity fund that uses money from Goldman and outside clients, took EDMC public again last October. The company has reduced its debt to $1.53 billion.
"The debt from the acquisition changed the culture of EDMC, according to Robert T. McDowell, who retired as EDMC's chief financial officer shortly after the buyout. Before the acquisition, McDowell says he and other executives resisted calls from Wall Street analysts to pursue growth opportunities that" could undermine academic quality. "You take on that amount of private-equity debt, you need to earn high rates of return for these investors," says McDowell, who worked at the company for 18 years. "I was worried that the quality of the experience for employees and students was going to deteriorate."
"At the New England Institute of Art in Brookline, Mass., administrators show off classes averaging 16 students using new computers and the latest software in the animation program. The school has a $500,000 sound studio, a 14,000-volume library, and a student-run art gallery.
"In its promotional materials, EDMC highlights graduates such as Jonathan Lukason, who received his bachelor's in audio and media" technology in 2008 from New England and has worked as a freelance audio engineer for NBC (GE) and ESPN (DIS). In an interview, Lukason calls the institute's program "the best one around." Still, Lukason complains, he earned $25,000 in his first year out of school, and he is struggling with $55,000 in student loans. "At this rate, I'll be dead before I pay it off," he says."
"To sell students on degrees, EDMC de-emphasized their costs and offered sales incentives to employees for signing up prospects, says Brian Buchanan, a former admissions officer whose lawsuit against EDMC was unsealed in May. Top producers won spots in the "President Club," which entitled them to trips to foreign beach" resorts, gift cards, and iPods, according to Buchanan's suit, which was filed in 2007 in U.S. District Court in Pittsburgh. Buchanan, a former waiter, worked as an admissions representative for EDMC's South University online from December 2005 until May 2007.
"In an interview, Buchanan said EDMC gave admissions staff a matrix showing them how much money they would make for each enrollment. Generally, each student was worth $800, he said. To recruit" students, EDMC told employees to use the "bring the pain" sales tactic, according to his lawsuit. For example, a single mother would be told, "How are you going to explain to your children that you cannot buy them the things they need because you couldn't be bothered to finish your education?" the complaint says. Buchanan's case is a whistle-blower suit that seeks to recover damages on behalf of the federal government with the plaintiff keeping a share. In a Securities & Exchange Commission filing, EDMC said the claims are "without merit."
"In July, instructors at the Art Institute of Seattle raised" questions about EDMC when they tried to join the American Federation of Teachers. The union lost in a 48 to 64 vote. Instructors objected to high-pressure marketing to students to take out loans they couldn't afford, says Sandra Schroeder, president of the AFT in Washington State. The institute encourages faculty to give passing grades to students who aren't making progress, she says, so the school can keep collecting federal aid money. EDMC administrators take the allegations seriously and "respect and promote the principles of academic freedom without fear of repercussion or interference," Muller says.
"Students also object to EDMC practices. Argosy University in Dallas falsely told applicants to the clinical psychology doctoral" program that the institution would get accredited by the American Psychological Assn., 18 former students claim in a lawsuit filed in Dallas County District Court last year. Stephanie Capalbo, one plaintiff, moved from suburban New York City to go to the Texas university. In an interview, Capalbo, who got her doctorate in 2008, says officials told her the school was in the process of getting accreditation, which it still hasn't achieved. Capalbo says she now owes about $130,000 in government loans for Argosy tuition and fees and another $150,000 in private loans for living expenses. Her payments are $1,500 a month, draining the $60,000 the 29-year-old makes each year working for a nonprofit that evaluates children for foster care in New York. Many" employers turned her down for higher-paying jobs because she lacks a degree with APA accreditation, she says. "I love being a psychologist, but I have a family," she says. "I'll be working the rest of my life to pay off these student loans. It's an unbearable debt."
"EDMC spokeswoman Muller says the allegations in the lawsuit against Argosy are "unfounded" and that APA accreditation isn't required for graduates to become licensed as clinical psychologists in most jurisdictions, including Texas. Argosy hasn't submitted an application to the APA and continues to prepare for the accreditation process, which takes time because of the data required, Muller says. She adds that colleges can't control the amount of debt that a student takes on.
"Carrianne Howard, the Florida student, didn't borrow for her education. Instead her parents paid roughly $70,000 in tuition bills. Her mother, an airline data analyst, and her father, a computer engineer, sold their California home and moved to Virginia after her father lost his job and her mother retired." They used money from the sale to pay for tuition, and her parents are now struggling financially, Howard and her mother say.
"Howard grew up in Valencia, Calif., a suburb of Los Angeles, and became drawn to video gaming during high school. One afternoon in 2004, an Art Institute ad popped up on her PC. "I was as excited as can be," she says. "I thought it was a dream come true." She and her mother toured the Fort Lauderdale campus, a bright, modern three-story building flanked by reflecting pools and palm trees." Her tour guide "just made it sound really exciting and a lot of fun, like I was going to make hundreds of thousands of dollars," Howard says. EDMC schools train representatives to make "no promise, implication, or guarantee" about employment, Muller says.
"A couple of years into her studies, Howard says she grew disenchanted. Some classes consisted largely of playing video" games, she says. She wanted to drop out but her mother insisted she finish because the family had spent so much already. She graduated in December 2007; in March 2009 she lost her first job, at GameRecruiter, a Fort Lauderdale-based gaming industry employment agency where she was making $12 an hour. Marc Mencher, GameRecruiter's president and CEO, says she was let go only because he closed down her entire department, and calls her "an exceptional performer."
"She may be struggling to find work in part because of inadequate preparation from the Art Institute's gaming department, Mencher says. "It's a weak program because it's understaffed," says" Mencher, who serves on the Art Institute's national advisory board for gaming programs. "I personally feel the students aren't getting their money's worth." After Bloomberg Businessweek asked EDMC for comment, Mencher sent a follow-up e-mail, saying that although the Art Institute is "not perfect and they have issues like any organization," it is "an excellent program built on input from respected industry professionals along with local employers." It has an "outstanding placement" record for graduates, he said.
"Howard applied for dozens of jobs, not only in gaming but also in grocery stores and nursing homes, mostly for minimum wage, she" says. In October 2009, Howard turned to adult entertainment by doing paid Web chats. In March she started dancing at Lido Cabaret, earning $400 to $1,000 a week, she says.
"She now hopes to save enough to go back to college and get a business degree. As she considers returning to school, Howard also helps run an anti-Art Institute website, where she has collected more than 70 names in a petition to send to the U.S. Education Dept.
"The private, nonprofit Florida Institute of Technology, where Howard would like to enroll, won't accept any of her credits from" EDMC, according to spokeswoman Karen Rhine, because the Art Institute doesn't have the kind of accreditation the traditional college requires. In its school catalog and other documents, the Art Institute "does not imply or guarantee" that credits will transfer to other universities, says EDMC's Muller.
"At 1 a.m. on a recent weeknight, Howard finished a shift at Lido. "This is what I do," she says. "When I'm in here, I try not to think about the Art Institute"."
Hechinger, John. 2010. "What's This Degree Worth?" Bloomberg Businessweek (9 August): pp. 66-69.
Carrianne Howard dreamed of designing video games, so she enrolled in a program at the Art Institute of Fort Lauderdale, a for-profit college part-owned by Goldman Sachs. Her bachelor's degree in game art and design cost $70,000 in tuition and fees. After she graduated in December 2007, she found a job that paid $12 an hour recruiting employees for video game companies. She lost that job a year later when her department was shuttered. These days, Howard, 26, makes her living in a way that doesn't require a college diploma: by stripping at the Lido Cabaret, a topless club in Cocoa Beach, Fla. "I didn't know what else to do," she says. "I've got a worthless degree. It's like I didn't attend school at all".
"Like many investors, Goldman, owner of 38 percent of the Art Institute's parent, Education Management Corp. was drawn to for-profit colleges by their rapid growth and soaring stock prices. Now Goldman, which recently agreed to pay $550 million to settle U.S. civil-fraud charges related to the subprime mortgage meltdown, is invested in an industry under attack from Congress, the Obama Administration, and dissatisfied students. This week the Senate held a hearing featuring a Government Accountability Office undercover probe that found recruiters at EDMC's Argosy University in Chicago and 14 other for-profit colleges misled investigators posing as potential students about the cost and quality of their programs. Near their peak in April, Goldman's shares in EDMC were worth $1.39 billion. Since then they've fallen by 42 percent, to about $800 million."
"A proposed government crackdown could have a disproportionate effect on EDMC. The U.S. Education Dept. could restrict taxpayer-funded grants and loans to for-profit colleges like EDMC that offer $50,000 associate's and $100,000 bachelor's degrees in such low-paying fields as cooking, art, and design. Until recently the education business looked like a bonanza for Goldman. Pittsburgh-based EDMC, the second-largest U.S. chain of for-profit colleges after Apollo Group's (APOL) University of Phoenix, has 136,000 students -- more than three times as many as the University of Michigan. Its annual revenue doubled over the last five years, to $2.4 billion. Goldman and two other firms bought EDMC in 2006 and took it public in 2009. Along the way they shared at least $70 million in advisory, management, and other fees, according to securities filings. Goldman also became EDMC's biggest stockholder."
"Government grants and loans to students, combined with booming enrollment, have made for-profit colleges a rewarding investment. Federal aid to for-profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 2000, according to the Education Dept. EDMC currently receives almost 82 percent of its revenue from federal financial aid programs."
"On July 23, the Obama Administration proposed restricting -- and in extreme cases, cutting off entirely -- programs whose graduates end up with the highest debts relative to their salaries and have the most trouble repaying their student loans. EDMC will be affected more than most other for-profit companies because of its focus on "passion" fields, such as art and cooking, rather than more practical accounting or business degrees, says Jeffrey M. Silber, an analyst with BMO Capital Markets in New York. Cooking, fashion, and arts jobs tend to have low starting salaries: A beginning cook, for example, earns an average of $18,000 a year, according to U.S. Bureau of Labor Statistics data, while a two-year culinary degree can cost $40,000 to $50,000. EDMC spokeswoman Jacquelyn P. Muller says Art Institute students tend to earn more, with those holding culinary degrees starting at $28,000."
"EDMC also faces complaints from its own graduates and employees. A lawsuit filed in Texas state court by 18 students alleges they were misled about the accreditation status of their program, diminishing their degrees' value and leaving them with debts they can't repay. In another suit a former admissions officer claims the company engaged in high-pressure sales tactics, paying staff to sign up students. In July, dozens of faculty who tried, unsuccessfully, to form a union at one Art Institute campus complained that unqualified students were being let into their classes.
"Like some of its students, EDMC has substantial debt. In 2006, Goldman Sachs, Providence Equity Partners, and Leeds Equity Partners borrowed $2 billion when the group purchased the company for $3.4 billion, taking it private in a leveraged buyout. Goldman, which made the investment through GS Capital Partners, a" private-equity fund that uses money from Goldman and outside clients, took EDMC public again last October. The company has reduced its debt to $1.53 billion.
"The debt from the acquisition changed the culture of EDMC, according to Robert T. McDowell, who retired as EDMC's chief financial officer shortly after the buyout. Before the acquisition, McDowell says he and other executives resisted calls from Wall Street analysts to pursue growth opportunities that" could undermine academic quality. "You take on that amount of private-equity debt, you need to earn high rates of return for these investors," says McDowell, who worked at the company for 18 years. "I was worried that the quality of the experience for employees and students was going to deteriorate."
"At the New England Institute of Art in Brookline, Mass., administrators show off classes averaging 16 students using new computers and the latest software in the animation program. The school has a $500,000 sound studio, a 14,000-volume library, and a student-run art gallery.
"In its promotional materials, EDMC highlights graduates such as Jonathan Lukason, who received his bachelor's in audio and media" technology in 2008 from New England and has worked as a freelance audio engineer for NBC (GE) and ESPN (DIS). In an interview, Lukason calls the institute's program "the best one around." Still, Lukason complains, he earned $25,000 in his first year out of school, and he is struggling with $55,000 in student loans. "At this rate, I'll be dead before I pay it off," he says."
"To sell students on degrees, EDMC de-emphasized their costs and offered sales incentives to employees for signing up prospects, says Brian Buchanan, a former admissions officer whose lawsuit against EDMC was unsealed in May. Top producers won spots in the "President Club," which entitled them to trips to foreign beach" resorts, gift cards, and iPods, according to Buchanan's suit, which was filed in 2007 in U.S. District Court in Pittsburgh. Buchanan, a former waiter, worked as an admissions representative for EDMC's South University online from December 2005 until May 2007.
"In an interview, Buchanan said EDMC gave admissions staff a matrix showing them how much money they would make for each enrollment. Generally, each student was worth $800, he said. To recruit" students, EDMC told employees to use the "bring the pain" sales tactic, according to his lawsuit. For example, a single mother would be told, "How are you going to explain to your children that you cannot buy them the things they need because you couldn't be bothered to finish your education?" the complaint says. Buchanan's case is a whistle-blower suit that seeks to recover damages on behalf of the federal government with the plaintiff keeping a share. In a Securities & Exchange Commission filing, EDMC said the claims are "without merit."
"In July, instructors at the Art Institute of Seattle raised" questions about EDMC when they tried to join the American Federation of Teachers. The union lost in a 48 to 64 vote. Instructors objected to high-pressure marketing to students to take out loans they couldn't afford, says Sandra Schroeder, president of the AFT in Washington State. The institute encourages faculty to give passing grades to students who aren't making progress, she says, so the school can keep collecting federal aid money. EDMC administrators take the allegations seriously and "respect and promote the principles of academic freedom without fear of repercussion or interference," Muller says.
"Students also object to EDMC practices. Argosy University in Dallas falsely told applicants to the clinical psychology doctoral" program that the institution would get accredited by the American Psychological Assn., 18 former students claim in a lawsuit filed in Dallas County District Court last year. Stephanie Capalbo, one plaintiff, moved from suburban New York City to go to the Texas university. In an interview, Capalbo, who got her doctorate in 2008, says officials told her the school was in the process of getting accreditation, which it still hasn't achieved. Capalbo says she now owes about $130,000 in government loans for Argosy tuition and fees and another $150,000 in private loans for living expenses. Her payments are $1,500 a month, draining the $60,000 the 29-year-old makes each year working for a nonprofit that evaluates children for foster care in New York. Many" employers turned her down for higher-paying jobs because she lacks a degree with APA accreditation, she says. "I love being a psychologist, but I have a family," she says. "I'll be working the rest of my life to pay off these student loans. It's an unbearable debt."
"EDMC spokeswoman Muller says the allegations in the lawsuit against Argosy are "unfounded" and that APA accreditation isn't required for graduates to become licensed as clinical psychologists in most jurisdictions, including Texas. Argosy hasn't submitted an application to the APA and continues to prepare for the accreditation process, which takes time because of the data required, Muller says. She adds that colleges can't control the amount of debt that a student takes on.
"Carrianne Howard, the Florida student, didn't borrow for her education. Instead her parents paid roughly $70,000 in tuition bills. Her mother, an airline data analyst, and her father, a computer engineer, sold their California home and moved to Virginia after her father lost his job and her mother retired." They used money from the sale to pay for tuition, and her parents are now struggling financially, Howard and her mother say.
"Howard grew up in Valencia, Calif., a suburb of Los Angeles, and became drawn to video gaming during high school. One afternoon in 2004, an Art Institute ad popped up on her PC. "I was as excited as can be," she says. "I thought it was a dream come true." She and her mother toured the Fort Lauderdale campus, a bright, modern three-story building flanked by reflecting pools and palm trees." Her tour guide "just made it sound really exciting and a lot of fun, like I was going to make hundreds of thousands of dollars," Howard says. EDMC schools train representatives to make "no promise, implication, or guarantee" about employment, Muller says.
"A couple of years into her studies, Howard says she grew disenchanted. Some classes consisted largely of playing video" games, she says. She wanted to drop out but her mother insisted she finish because the family had spent so much already. She graduated in December 2007; in March 2009 she lost her first job, at GameRecruiter, a Fort Lauderdale-based gaming industry employment agency where she was making $12 an hour. Marc Mencher, GameRecruiter's president and CEO, says she was let go only because he closed down her entire department, and calls her "an exceptional performer."
"She may be struggling to find work in part because of inadequate preparation from the Art Institute's gaming department, Mencher says. "It's a weak program because it's understaffed," says" Mencher, who serves on the Art Institute's national advisory board for gaming programs. "I personally feel the students aren't getting their money's worth." After Bloomberg Businessweek asked EDMC for comment, Mencher sent a follow-up e-mail, saying that although the Art Institute is "not perfect and they have issues like any organization," it is "an excellent program built on input from respected industry professionals along with local employers." It has an "outstanding placement" record for graduates, he said.
"Howard applied for dozens of jobs, not only in gaming but also in grocery stores and nursing homes, mostly for minimum wage, she" says. In October 2009, Howard turned to adult entertainment by doing paid Web chats. In March she started dancing at Lido Cabaret, earning $400 to $1,000 a week, she says.
"She now hopes to save enough to go back to college and get a business degree. As she considers returning to school, Howard also helps run an anti-Art Institute website, where she has collected more than 70 names in a petition to send to the U.S. Education Dept.
"The private, nonprofit Florida Institute of Technology, where Howard would like to enroll, won't accept any of her credits from" EDMC, according to spokeswoman Karen Rhine, because the Art Institute doesn't have the kind of accreditation the traditional college requires. In its school catalog and other documents, the Art Institute "does not imply or guarantee" that credits will transfer to other universities, says EDMC's Muller.
"At 1 a.m. on a recent weeknight, Howard finished a shift at Lido. "This is what I do," she says. "When I'm in here, I try not to think about the Art Institute"."
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