Keynes was right and the Austerians are wrong

Via Paul Krugman comes a report from Henry Blodget that a few European leaders have finally figured out: Keynes was right and the Austerians are wrong. And BBC reports that the UK economy has seen real GDP decline for two consecutive quarters. BBC also notes:

Prime Minister David Cameron said the figures were "very, very disappointing". "I don't seek to excuse them, I don't seek to try to explain them away," he said at Prime Minister's Questions. "There is no complacency at all in this government in dealing with what is a very tough situation, which frankly has just got tougher." He said it was "painstaking, difficult" work, but the government would stick with its plans and do "everything we can" to generate growth.

Does he mean sticking to austerity, which likely caused the economic downturn?

The Precautionary Principle and the Iraqi WMD Test

My emeritus colleague, John Perkins, asks a deep question about proposed justifications for a precautionary principle: would they, in early 2003, have provided a basis for the US invasion of Iraq despite, or even because of, uncertainty about the existence of Iraqi weapons of mass destruction?  The stylized decision situation is this: the US has suspicions that horrible chemical or biological weapons are being stockpiled in Iraq, but there is no firm evidence.  Indeed, the likelihood of WMD’s is small, but the negative consequences if they actually exist are severe.  Suppose further that decision-makers are honest (this is a purely hypothetical test) and want to act rationally so as to minimize the harm of either launching or not launching military action.  In other words, this is a make-believe scenario, but one that nevertheless captures an important aspect of the meaning of precaution: if being precautionary in such a situation makes you more likely to want to invade Iraq, you have a problem.

So is there a version of the precautionary principle that passes this test?  Intergenerational equity arguments (irreversibilities justify low or zero discount rates) are at best a wash, since the costs of under- or overestimating the likelihood of WMD’s have approximately the same time profile.  (The main problem with intergenerational equity is that, while it is a fine concept, it has little relevance to most situations that might require precaution; precaution is about coping with uncertainty, not valuing immediacy versus delay.)  Fat tail aversion à la Weitzman would seem to fail the test, since it would place greater value on insuring against catastrophic WMD risk.  According to this principle, it’s better to accept the certain devil we do know (invasion) than run the risk of the less likely but even worse devil we don’t.  You could argue for a different type of precaution: don’t mess with nature.  This would avoid WMD dilemmas by defining precaution as being about only environmental questions, but at the cost of being either grossly impractical or incoherent.  Example: agriculture, even the most organic kind, is absolutely messing with nature, as are many of the other essential practices of the human race.  Green-is-good is an attitude, not a rational basis for a decision principle.

I think my version of precaution does pass the test.  To recap (OK, not “re” for most readers), I propose that metadata—the history of how we have learned in the past—is relevant to evaluating our ignorance in the present.  If a company had a record of underperforming its earnings target quarter after quarter, you would take this into account even if you had no current information regarding the likelihood of its meeting its next target.  Similarly, what distinguishes the emergence of ecological understanding over the past century or so is that we systematically discover that species, including our own, are more interdependent than we thought, and more sensitive to alterations in their natural environment at lower exposure thresholds.  It is rational to expect that the larger part of our current uncertainty regarding environmental impacts will resolve itself in similar ways in the future; hence precaution.

Here is why I think it passes Perkins’ test.  On the one hand, there has been a long series of manipulated intelligence reports used to justify policies favored by those in power in Washington; foreign threats usually turn out to be less threatening than initially reported.  (Intelligence pertaining to Japan pre-1941 might be an exception, maybe.)  On the other, invasions of foreign countries have typically turned out worse than expected: more resistance, more repression in response to resistance, more cruelty, more overall economic and human cost.  On both counts the metadata should be incorporated into the decision process, and both counsel precaution as I understand it.

My golden rule of precaution: make the decision today that, based on everything you know up to this point, you will be most likely to have wished you had made in the future, when you will have more information.  Assess the likely bias of your ignorance.

Inequality: Finance and Geography

I’ve just finished watching Jamie Galbraith’s INET talk on inequality (thanks, Yves) and was struck by his geographic discussion toward the end.  Most of the increase in US inequality in the last decade or two has been concentrated in just a handful of counties, particularly Manhattan, San Francisco, King (Seattle) and a few others.

Let’s suppose the explosion of high incomes in the financial sector accounts for about a fourth of the increased share claimed by the top 1%.  (Does anyone out there have a real number for this?)  Given geographic concentration, we should look also at the services consumed by the financial elite.  A rough law has it that the earnings of a service provider are proportional to the income of his or her clients.  A dog walker to the rich makes more than a preschool teacher in a low-income neighborhood.  We can therefore propose a sort of inequality multiplier associated with the initial bounty bestowed on those in finance: much more prosperous decorators, physicians, restauranteurs, etc.  These spillovers would be concentrated in close geographic proximity to the location of financial centers. The point is that there are both direct and indirect effects of finance’s grip on profits, much of which would not be captured by existing empirical methods.

Could a Strong Union Movement Save Social Security?

Pear, Robert. 2012. "Social Security’s Financial Health Worsens." New York Times (24 April): p. A 13.


http://www.nytimes.com/2012/04/24/us/politics/financial-outlook-dims-for-social-security.html?hp



"The Obama administration reported a significant deterioration in the financial outlook for Social Security on Monday, while stating that the financial condition of Medicare was stable but still unsustainable."



"The Social Security trust fund will be exhausted in 2033, three years sooner than projected last year, the administration said."



"In explaining changes in their Social Security projections, the trustees cited slower growth in average earnings of workers and the persistence of unemployment in the slow recovery from the recession. They lowered their projection of average real earnings in the future, primarily because of a surge in energy prices and “slower assumed growth in average hours worked per week after the economy has recovered.”



Let's see if we can get this straight. For 40 years wages have gotten hammered by the "job creators". People become increasingly reliant on Social Security, but the system is in trouble because people do not earn enough to get enough taxes taken away to cover social security. The obvious answer is to destroy social security.

The Not-So-Secret Weapon of the Campaign to Destroy Social Security: Cynicism

First, read these two articles, one from the Harvard School of Journalism, the other from the New York Times, back to back.  A match made in heaven, no?

Now that you’ve done your homework, here is my take.  For the past thirty years we have seen repeated campaigns to eviscerate Social Security—to privatize it, siphon off its finances, drain it of its essential social insurance character.  These have failed, not because of the brilliance or commitment of its defenders, but simply because it fulfills a vital social function and is wildly popular.  Even those who, in their heart of hearts, want to crush it to bits, claim to be in favor of “saving” it.  So what’s the strategy of the anti-SS minions?

Cynicism.  Convince younger voters, whose benefits are still decades away, that the program is dying a slow but certain death, and that politicians are too myopic or pandering or just stupid to do anything about it.  From time to time I poll my students, and by a big majority they always tell me that SS will not be around to support them in their retirement.  (Not that this has provoked a big Feldsteinesque spike in their personal savings....)  As this mindset takes hold, it becomes easier to simply tune out the debate over SS.  After all, it’s not like it’s actually going to be there when I’m old, no matter what they say, right?  At some point, it goes from being a third rail to a footnote to just background noise, to mangle a bunch of metaphors.

What I’d like to see are news stories that say something like, “Social Security has had its ups and downs, but it’s in better financial shape now than it was a generation ago, and unless its enemies prevail, it will be there for you when you need it.”

Pareto's Law: Understanding Inequality

Economists, always intent on making their work into a science, like to transform their ideas into a "scientific" law. Accordingly, the Fascist Italian senator, Vilfredo Pareto is credited with discovering Pareto's Law, which explains why inequality is a natural outcome. Pareto suggested that 20% of causes create 80% of effects. He argued that this law explains why 20% of the Italian population owned 80% of the wealth. Sadly, the U.S. experience calls Pareto's data into question, but then, those lazy Southern Europeans wallow in socialism.




There is a second Pareto Law, which offers a more accurate explanation inequality. In his Manual of Political Economy, he explained:


"In all periods of the history of our country we find facts similar to the practices we have just pointed out, permitting certain persons to use stratagems to appropriate to themselves the goods of others; hence we can assert, as a uniformity revealed by history, that the efforts of men are utilized in two different ways: they are directed to the production or transformation of economic goods, or else to appropriation of goods produced by others. War, especially in ancient times, has enabled a strong nation to appropriate the goods of a weak one; within a given nation, it is by means of laws and, from time to time, revolutions, that the strong still despoil the weak."


Pareto, Wilfredo. 1906. Manual of Political Economy, Ann Schweir, tr. (New York: Augustus M. Kelley, 1971): p. 341.


The final phrase about the strong despoiling the weak offers an excellent insight into the way that capitalist countries, led by the United States have been repealing Pareto's first law.

So What is Romney’s Plan for Medicare?

Brian Beutler notes another piece of Romney mendacity:

in an official statement reacting to the reports, Romney declined to describe the details of his plan. “Today’s report reminds us that Medicare must be reformed and strengthened or it will soon collapse,” he said. “President Obama has offered no serious plan of his own, preferring instead to attack and point fingers over problems he refuses to address. Mitt Romney has a comprehensive plan to preserve Medicare for today’s seniors while ensuring that it remains strong for future generations.”

Did you catch that? Romney says he has a comprehensive plan but it’s a big secret! But that’s not the mendacity that I’m referring to. President Obama did pass ObamaCare (or was that RomneyCare)? And Brian’s reporting also noted:

The good news is that the trustees believe the Affordable Care Act strengthened Medicare — and project, as they did last year, that the program won’t exhaust its hospital insurance trust fund until 2024.

Yes – there is uncertainty:

The Board assumes that the various cost-reduction measures — the most important of which are the reductions in the payment rate updates for most categories of Medicare providers by the growth in economy- wide multifactor productivity—will occur as the Affordable Care Act requires. The Trustees believe that this outcome, while plausible, will depend on the achievement of unprecedented improvements in health care provider productivity.

And we have heard that Romney as President will repeal ObamaRomneyCare which will worsen the Medicare situation. Are you thoroughly confused on Romney’s position now?

Romney as Surgeon?

Pema Levy watches Rudi Giuliani on Fox & Friends so we don’t have to:

This reminds me of, you know, going to a surgeon, right? If I’ve got a terrible cancer or something to be operated on, when I had to be operated on for prostate cancer, I didn’t go to the nicest doctor, I went to the best doctor. The guy could have a great personality and tell jokes [and he] put the knife in the wrong way. On the other hand, if he’s a great doctor, that’s my guy.

While a doctor does need to know how to ably control the knife, he also has to know how to diagnosis the ailment as well as ascertain the right procedure. And let’s just hope that the next time Mr. Giuliani has to go under the knife that his surgeon does not change his mind mid-operation.

Honoring Duncan Foley

On April 20-21 at the New School for Social Research there was a symposium held in honor of Duncan K. Foley at which he was presented a festschrift. It was organized by his now retired colleague, Lance Taylor, along with former student and coauthor Armon Rezai, and his coauthor on Growth and Distribution, Tom Michl. Duncan is now part-time at NSSR and about to turn 70. The symposium was a fascinating collection of people from his past discussing many ideas that Duncan has worked on over his career, from his orthodox work on general equilibrium theory, through his work on money in Marxian theory, his work on growth and distribution, econophysics, history of thought, financial markets, public goods, global climate, and other matters. He made a long personal commentary on his career at the end, and on Friday evening letters of admiration were read and many colleagues and students spoke about Duncan's work and influence on them most praisingly. I shall list who presented and then discuss some ideas of particular interest. The first session was on him personally. After the NSSR president presented him the festschrift, Michael Piore reminisced about their time at MIT together after Duncan finished his PhD in two years at Yale. Then I spoke about his role in the development of complexity economics. The second was on growth and distribution, with papers by Amitava Dutt, the French Marxist Gerard Dumenil, and Tom Michl. An idea pushed by both Dumenil and Michl is that a more useful short-run equilibrium condition for a macroeconomy is the rate of capacity utilization, arguing that unemployment rates are poorly measured, and that the natural rate of unemployment is an empty concept useless as an equilibrating condition. Then Duncan's major professor, Herbert Scarf, still very on top of things at 81, chaired a session on Decentralized, Dispersed Exhange, with his student now a philosopher, A.J. Julius proposing a catallactic adjustment to GE process, Graciela Chichilnisky discussing her role in writing into the Kyoto Protocol the cap and trade article, and arguing in favor of her idea of a green golden rule in which the present does not exploit the future and that the future does not exploit the present. She identified this as the meaning of sustainability. Then there were two papers on econophysics, Joe McCauley speaking on financial markets and Victor Yakovenko speaking on income and wealth distribution dynamics and patterns. The final session of Friday was on Value, Distribution, and Capital, chaired by his colleague, Ed Nell. Simon Mohun argued that the labor theory of value can be used to analyze shares of income between different categories of labor, counting supervisory workers wages as returns to capital. Ed Wolff discussed downsizing between 1967 and 1997, reporting that firms downsizing experienced falling profits and share prices, and that downsizing was linked to de-unionization. Anwar Shaikh dscussed how different categories of capital are treated in US national and income accounts, and Duncan's student from Stanford, Tracy Mott followed up on the themes of the earlier talks. On Saturday morning, K. Vela Velupillai spoke on Duncan's PhD thesis and how he had independently discovered a method of studying shadow prices for public goods due to Negishi. Peter Skott spoke on how accounting for positional concernsn by people increases the return to acting to slow global warming. The final session was the most stimulating. Perry Mehrling spoke about the hierarchy of money and how the current global system of credit and debt is operating. He posits that there is now an effective global lender of last resort, the C5. This group is the key group of the five most important central banks, the Fed, the ECB, the Bank of Japan, the Bank of England, and the Swiss central bank. Curious that the Bank of China is not part of this group, despite the increasing importance of the Chinese economy in the world. Phil Mirowski spoke on his ideas of markets as markomata or information processing mechanisms and argued a Minsky view that the financial markets inevitably destabilize themselves. Finally, Rajiv Sethi spoke on how algorithmic trading is destabilizing world financial markets. There were some heated discussions in this session, all very stimulating.

What's the Mythology For, Anyway?

What's the Economy For, Anyway?: Why it's time to stop chasing growth and start pursuing happiness, by John de Graaf and David K. Batker, 2011. Bloomsbury Press.

Here's something Sandwichman didn't know: "Hoover and Roosevelt (and their predecessors) had one thing in common. None entered office with a model or theory of how a national economy works."

Another Casualty of the Hitler-Did-It-Too Gambit

Others, like Brad DeLong and Mark Thoma, have gone after Acemoglu and Robinson for their “argument” that, because Hitler used massive stimulus to extricate Germany from the Depression, there is nothing intrinsically progressive about Keynesianism.  I want to make a different point.

Hitler and his minions were evil and did unspeakably awful things on a massive scale.  Are we clear?  Now, let’s talk about the complications of real history.

The Nazis did not descend on Germany sprouting horns and hooves.  True, reasonable people knew from the start they were very bad news, but there were aspects of the Nazi program that were attractive as well.  High on the list was a realistic program to restore economic growth, including large-scale stimulus, capital controls and renunciation of the Versailles debt.  Remember that, before Hitler, there was Brüning.  It should also be mentioned that the Nazis had an exceptionally progressive environmental and public health agenda, including restrictions on smoking, pesticide-free agriculture, workplace safety and improvements in diet.  If you doubt this, read The Nazi War on Cancer, an extraordinary, mind-bending book by Robert Proctor.

Again, none of this justifies a regime that committed such colossal crimes—but that’s not the issue.  Hitler was not an incarnation of pure evil, just an exceptionally destructive but in some ways normal political leader.  He rose to power by addressing real needs of real people.  You don’t prove that vegetarianism or organic agricultural are reactionary by showing that they were sponsored by the Third Reich, and the same goes for Keynesian stimulus.  Repeat: it’s about seeing Hitler not as a slogan or comic book villain, but as a real life historical figure with layers of complexity.

And once again, since I will probably be misunderstood: yes, the racism, militarism, totalitarianism and genocide were unspeakably horrible.

The Utter Failure of EU Structural Funds

Maybe this is a hot topic of conversation in other venues, but has anyone here noticed that the imbalances crisis of the Eurozone is exactly what the structural/cohesion funds were supposed to forestall?  Billions spent, and what to show?  I run each morning on an EU-funded trail, for which I am supremely thankful, but I would gladly forego it to somehow, magically rescue the good people of Europe from the maw of austerity.

Was it destined to be thus?

Berlin Diary

I wanted to liveblog from the INET conference in Berlin, but I was too zoned on all the ambient stimulus and nutrient rushes from the endless flow of food that I couldn’t pull it off.  So now, a few days late, here are some random notes:

That wasn’t really Jörg Asmussen of the ECB on day 1.  It was actually a standup comedian who had perfectly mastered central bankspeak in order to exaggerate and make fun of it.  Funny how I was the only one in the audience who seemed to know what was going on.

Axel Leijonhufvud pulled something on day 1 I’ve never seen before at an academic conference: he flashed the title slide from his PowerPoint, then said “This is not my paper.”  After this, another title slide and another disclaimer.  I wish he had gone on in this mode.  Ages ago, when I was a freshman in college, I went to a poetry reading by Charles Olsen.  He began by opening a large briefcase, saying, “There’s a poem here I would like to read to you.”  Then he spent a few minutes leafing through it—no luck.  So he pulled out a different poem.  “This is not the one I want, but give me a few minutes for it anyway.”  Then back to the briefcase for several more futile minutes.  Then another wrong poem.  Then more briefcase.  Of course, he never found what he was looking for.  I’ve always wondered whether this was chaos or schtick.

Anyway, AL wants bankers to be paid in equity, and he wants liability to be limited not at zero but at some negative value, whatever it takes to evoke behavior that is acceptably prudent.

Norbert Walter took one look at the hostile crowd massed under the (invisible) banner of Keynes and decided not to engage in any discussion.

Fossil fuel imports are as relevant for the Eurozone as they are for the US, maybe more so.  Without the current account overhang of these imports, the periphery might be able to make it.  (But that assumes the euro wouldn’t rise in a sort of reverse Dutch effect, cutting into exports.)

Wolfgang Munchau said something I hadn’t thought of that sounds right.  I asked him about my pet theory regarding why some of the Landesbanken got into big trouble, despite their historic focus on financing the Mittelstand rather than newfangled financial instruments, which is pressure from Brussels.  They were facing a lot of heat and had to demonstrate a market rate of return (i.e. no subsidies), and the poor trusting souls managing their portfolios just bought a bunch of toxic AAA’s with no questions asked.  Yes, said Wolfgang, this is part of the story, but the bigger part is that, with the ballooning of the German current account surplus in the early and middle parts of the decade, the Landesbanken found themselves with an excess of deposits.  After they had made all the reasonable loans they could find to their Mittelstand borrowers, they had gobs more to dispose of.  Then the stories converge: poor trusting souls, etc.

Katharina Pistor gave what looked like an interesting presentation on financial markets based on a hierarchical vision of their structure.  Looked, alas, because the acoustics were terrible, and she has a quiet voice, so I could only guess at her content.  Her talk is up in video; you should check it out.

John Kay’s talk was memorable.  He is of the opinion that the hyperprofitability of finance in the runup to the crisis (and since, I would imagine) is illusory.  There were no such superprofits.  It was/is accounting fraud on a cosmic scale.  What do readers think of this?

I garbled a question from the floor about the democratic deficit in Europe–-didn’t ask it the way I wanted—but it didn’t matter.  Really, all I had to do was use the two d words.  They had been missing from the vocabulary and it was starting to rankle.

On the other hand, I had the pleasure of hearing a speaker refer to a cost-benefit study I had done about a decade ago on an entirely unrelated topic (child labor), a truly odd coincidence.

Armin Falk gave the sort of talk that makes me schizophrenic.  He summarized a lot of studies that show that fairness in labor relations is a win-win.  Yes, but how to explain unfairness?  Are lots of firms just making mistakes, or do they know something that academic economists don’t?

Jim Heckman gave his now well-known plea for big investments in early childhood education.  Elsewhere, I’ve written that the criterion of equal opportunity requires specifying a moment of equality.  In the language of the footrace metaphor, if the criterion of fairness is a fair starting point for everyone, you have to designate that point.  I think for Heckman it may be around age three, on pragmatic if not philosophical grounds.  (The later you make it, the more individual choice you have to override.)  Me, I’m in favor of fun runs with just enough prizes to get people to stretch out a little.  Meanwhile, Heckman praised Schooling in Capitalist America, whose coauthor, Herb Gintis, was in attendance.  For JH, this is a book about the value of noncognitive skills, which everyone needs to acquire.

I’m leaving out all the reunions and new contacts that are what conferences are really about.  You had to have been there....

Anonymous Wisdom on the So-Called Microfoundations of Macro

The verbiage-to-insight ratio is very high everywhere, so short, smart statements have to be noticed whenever they pop up.  I found one from the great tribe of Anonymous, who posted a comment over at Noahpinion:

In macroeconomics, we don't have microfoundations to the point of the individual consumer (i.e. we don't literally model the decisions of every agent in the economy, or every particle in the system). I don't think macroeconomists want to go in that direction at all (hence the resistance to agent based modelling). What we do have is a model for the aggregate behavioural response to a policy as a function of fundamentals. An important difference between physics models and economic ones is that expectations about the future affect decisions today, and so it is important to capture this channel. It is not necessary that microfoundations be completely analogous to the micro level decision however, because we are modelling the aggregate behavioural response, not the individual level one. See for example much of Prescott's writing on interpreting the Frisch elasticity in macroeconomic models. I think a lot of the discussion here implicitly assumes that microfoundations refer to particle level interactions, they do not. Whether they are structurally invariant under the policy considered, well, that depends on the model and the policy.

My main purpose is to get you to read and think about this comment, which is more subversive than perhaps its author realizes.  As for my reactions, here are a few:

1. The term “microfoundations” is fundamentally misleading.  What we really have are aggregate behavioral functions.  Economists feel more comfortable if the functions that predict collective behavior mirror those that they are familiar with at the individual level, but since collective behavior is not derived from individual behavior, this preference has no theoretical basis.

2. It is possible that optimization assumptions that are so flawed at the individual level may work better at the collective level, in the sense of better explaining the data.  I don’t think that’s the case on my planet, but I grant that the failings of this behavioral model at the individual level are not in themselves dispositive.

3. Since we are not deriving aggregate behavior from individual behavior, we are free to play with models that might not be applicable to individuals.  Thus we can consider models of the formation, competition and dissolution of norms and conventions, or herd behavior at the level of the herd.

4. While a full specification of the state of the world at time 0 would enable us to predict, perhaps with error, behavior in time 1, no one is trying to do this.  Instead, we have radically incomplete specifications with models that are essentially heuristic, somewhat better or worse at explanation and prediction under particular circumstances.  Thus the goal of forecasting has to be scaled back.  What we can do if we are really at the top of our game is generate forecasts that are conditional on a possibly large number of future circumstances which themselves cannot be forecasted.  We don’t know whether a major war or natural disaster will disrupt the economy over the coming months, or whether the “mood of the market” will shift substantially, or even the full extent of exposure of the financial system to the systemic risks implicit in their various derivative instruments.  We can’t put percentages on them either.  All we can do, at best, is arbitrarily identify a large set of assumptions and forecast conditionally on them.  (And one catch-all assumption is that none of the consequential unknown unknowns will materialize.)  For this reason, forecasting may be a false goal.  A more serviceable one would be to identify processes with known dynamics in as close to real time as possible.  Example: I can’t forecast the effect of “fiscal consolidation” (austerity) on European growth rates, but I can possibly track the process by which falling credit and output demand on the part of the state is generating reduced income and monetary growth in the present.  A lot else is going on that will affect how Europe progresses, but do I need to construct forecasts that are sensitive to it?

The Demise of Higher Education in the United States

The United States has experienced two major growth spurts in higher education. In 1862, the Morrill Act changed the face of higher education will by granting each state 30,000 acres of public land for each senator and representative. Sale of the land was intended to create an endowment fund for the support of colleges in each of the states. Prior to the creation of the land-grant colleges, higher education was predominantly intended for wealthy students and those intending to serve as clergy. The land-grant colleges expanded higher education to different regions and a different class of students. This expansion, however, was still incomplete.

The second episode was the G.I. Bill, which was not so much intended to promote education, but rather to prevent another Bonus March, in which angry soldiers returning from the First World War demanded early payment of their promised bonuses to help cushion the hardships of the Great Depression. Offering education was expected to channel potential discontent.

The G.I. Bill paid a different kind of bonus. The doors of colleges and universities opened to people for whom higher education would have been out of reach. Their skills proved invaluable during the postwar economic boom. A second unintended bonus flowed from the G.I. Bill. To accommodate the massive inflow of students, colleges and universities built infrastructure to expand their capacity to handle so many students. After the wave of veteran enrollments dissipated, colleges and universities had to choose between letting this infrastructure sit idle or enrolling more students.

Judging from my experience teaching during the Vietnam War, returning these veterans must have made an important contribution to the teaching environment. Although many soldiers were unable to put their lives together after the trauma of war, some came back, totally focused on making something of themselves. Some of their maturity and dedication rubbed off onto the younger cohort of students.

A less dramatic burst of government spending into education came from the National Defense Education Act of 1958, which was a response to the USSR's launch of Sputnik, the previous year. This time, much of the money was narrowly focused on improving the quality of science and language education.

I have personally experienced the rise and fall of higher education in the United States. I enrolled at the University of Michigan in 1957, a few months before Sputnik was launched then, in 1965, I enrolled in graduate school at the University of California, Berkeley. This was a time of great optimism about the future. I did not realize that very hard times for higher education were about to begin.


As the student population swelled during the 1960's, the youth culture developed as a result of demographic changes, the Vietnam War and skepticism about consumptionism clashed with a different kind of pressure: a sagging rate of profit, following decades of unparalleled prosperity.
Under these conditions, the goal became to reverse the gains from the G.I. Bill. Rather than including people in education, who might otherwise threaten the status quo, reining in the University system seemed urgent. In the fall of 1970, Governor Reagan's aide Roger Freeman, who later served as President Nixon's educational policy advisor, while he was working at the time for California Governor Ronald Reagan's reelection campaign, commented on Reagan's education policy: "We are in danger of producing an educated proletariat. That's dynamite! We have to be selective about who we allow to through higher education. If not, we will have a large number of highly trained and unemployed people."

In 1971, just before he was nominated for the Supreme Court, Lewis Powell, a corporate lawyer wrote a now-famous memo, "Attack of American Free Enterprise System" for the Chamber of Commerce. Higher education appeared to be at the heart of this attack on free enterprise. He described how the Chamber could gain more control over the educational system.

Although the memo was superficial at best, it sparked great interest among the elites, influencing or inspiring the creation of the Heritage Foundation, the Manhattan Institute, the Cato Institute, Citizens for a Sound Economy, Accuracy in Academe, and other powerful organizations.
The response to the falling rate of profit also played a role in changing education. Tax reduction had the attraction of partially restoring profits, but it also had an important effect on education. Growing budget deficits would ramp up pressure to privatize what had been previously public responsibilities. By largely defunding education, universities became increasingly dependent on corporate money. Administrators became cautious about allowing expression of ideas that might seem upsetting to business. These factors took an enormous toll on higher education.

Tuition began a rapid ascent. Student debt accumulated. University funds were concentrated on programs that cater to business needs, such as biotechnology and engineering, and, naturally, business schools. Visiting Berkeley, I am always struck by the lavish libraries for biotechnology and business, while the other disciplinary libraries were unchanged. The one exception that stood out was public health, which was torn down to make way for a new biotech building and then moved to the basement of an old administrative building.
The educational assembly-line that Mario Savio described during the Free Speech Movement at Berkeley has changed, but not for the better. At the same time, leaders in business and politics insist that education is an essential element to a successful economy. Nonetheless, education becomes increasingly unaffordable, at the same time that the quality. Each cohort of students seems less prepared than the last.

All the while, graduate programs are educating students for work that they love, even though top prospect are slim.