The Debt Limit Hobbits

From The Wall Street Journal Op-Ed pages,

"The debt-limit hobbits should also realize that at this point the Washington fracas they are prolonging isn't helping their cause. Republicans are not looking like adults to whom voters can entrust the government."  

---"The Debt Limit Hobbits," The WSJ (7.30.11)

And from the Wall Street Journal, yet. You have to love it. But they are just saying what is more than apparent to most Americans--or should be. That they feel it has to be said from so lofty a dais as the op-ed pages of the WSJ indicates how deaf the tin ears in the GOP's right-wing camps must be. And it's all okay with me. The more, the longer they play the irresponsible obstructionists, the longer they stretch out or deny effective, but reasonable deficit reduction legislation, the weaker and less re-electable they become. Let them proceed just as deaf, dumb and blind as they have been right through the 2012 elections. Then, perhaps, the electorate will present us with a more balanced, more centrist legislature to proceed with the increasingly pressing business that burdens our country.


Link here:

http://professional.wsj.com/article/SB10001424053111904888304576476153557599820.html?mod=WSJ_Opinion_LEADTop&mg=reno-wsj

I Have Questions, Deficit Reduction Questions

I have questions, deficit reduction questions, but can find no answers. Apparently, no one has the answers, not satisfactory ones, useful ones. Or, they are not sharing them. Even the questions do not appear to be part of the public discourse.

My questions have to do with the impact on our fragile economic recovery of the structure, the focus and timing, of the alternative deficit reduction plans now being debated. Everyone knows that, within limits, fiscal policy can either stimulate or dampen economic behavior and performance--or at least they should know that. The research and empirical evidence are clear. But the state of the economy and timing matters, too--and it can matter a lot.

When the economy is in recession (or worse), increasing government spending for social support or other programs, or reducing taxes, is stimulative to economic growth, within limits. And even though larger, intermediate-term deficits will result, it is still the more effective, less painful course, so long as the increased deficits can be managed back to acceptable levels as the economy grows stronger. (Note that this option is not even available to us with a balanced budget amendment.)

But when the economy is in a nascent or fragile recovery, when it is still weak, if government takes money away from people who would otherwise spend it, either by reducing social support spending or increasing taxes, it has a dampening effect on consumption and economic growth, depending on the size and materiality of the program changes. This is less true, or has a lesser impact, in times of strong economic performance.

So, first question: is our economy now resilient enough to increase taxes or decrease social program benefits without halting the fragile recovery and pressing us back into recession? What are the indicators and measures that guide us? Second question: Do we know or have any guidance on how much to increase or decrease these economically stimulative or dampening fiscal choices even if we are confident about the general direction? And, the third question: Does anyone in the congress or administration elevate such questions (and any available answers they may have) above political and ideological considerations?

The third question is the easiest to answer. In the end, politics rule, or at least play a dominant, mediating role. No, they can't be so irresponsible as to ignore whatever economic knowledge and data point them to the better choices and results, although short-term results always play a disproportionately large role in decision making. In any prior time, I would have said that ideological considerations play a role, but balance, prudence and compromise, fiscal, budgetary and economic responsibility, would rule at the end of the day. Even when the Democrat's left wing were most effective and influential, this was true. But no more. The most conservative Republicans and their Tea Party cousins have elevated ideological purity above all things, even taking pledges to place such considerations above all else. Frightening times. 

But still, wouldn't credible, authoritative data make a considerable difference to most everyone? And wouldn't you expect there would be good data and reliable guidance on the implications of these deficit reduction plans, the ridiculous Tea Party plan or the more realistic plans now receiving consideration? Why aren't we hearing and seeing more about that?

You say that the government, the CBO and Fed and others do put out such analysis and information, as do various private economic and market newsletters. Of course, the arcane language, format and implications of these reports are understandable only by the few educated or trained in it. Even then, they are usually the subject of debate and disagreement because the reporting and conclusions reached by them is often internally ambiguous or conflicting, and they often conflict with one another. With all our economic experience and empirical evidence, the last century of accumulated data, the econometric modeling done by the Fed and Congress, by the investment banks and consulting firms, why don't we have more authoritative answers, or at least reasonably strong direction in answering these questions? And if we do, why isn't it part of the public discourse and debate--and presented in simpler, understandable terms to the public?

What tax laws and social programs will be changed and how will that impact different groups of Americans? Is that too much to ask, that the public be reasonably informed, in terms they can understand? 

I was comforted when, shortly after the TARP and stimulus programs were effected, Fed Chairman Bernanke made very clear that the larger, intermediate-term problem was the budget deficit. It had to be addressed, and addressed effectively. This was critical. But he cautioned that to move to raise taxes or reduce social programs before the economy strengthened and was convincingly on its way to recovery, would be to drive us back into recession or the depression we had successfully averted through the impact of TARP and the stimulus program.

I trusted Bernanke with his academic expertise on the Great Depression and more recent financial crises, along with his institutional knowledge and experience with the Fed. And I judged him a principled and trustworthy man. The TARP and stimulus programs were easy for me to have confidence in because of the dire circumstances and his role in addressing it all. Credibility. But more recently, on balance, my clear sense has been that the dangers are now greater in failing to address the budget deficits--largely because it appears most credible economists are in that camp (with the exception of Paul Krugman).

When Obama moved aggressively in that direction, I assumed the data, the modeling evidence, and even a great many Dems, supported that direction. But Chairman Bernanke has not spoken to this issue lately, at least not prominently and for impact. That he has not, I've taken as tacit approval for the initiative to start addressing reduction of the budget deficit. I assumed that either Bernanke is advising Obama on this or at least has given no indication of objection. And I assume Obama would have to be convinced given his natural, personal concern for retirement, education, and healthcare programs.

But now, even as the dysfunctional deficit reduction process stumbles embarrassingly forward, revised economic measures and indicators present to us a much weaker recovery than Bernanke had confidently projected. Does he feel that we are still on the right path, or is he merely resigned to the political realities and momentum of deficit reduction? Further, aren''t there now at least more refined question regarding the structure, focus and timing of program cuts, tax increases, or other revenues raised? It appears to me there must be. And even if we hear no legislative rationale of this sort offered, even if the public discussion says little or nothing of it, it must be a factor being analyzed and passed upon by someone of importance to the process, wouldn't you think?

It is on that basis that I find myself accepting the broad contours of Obama's implied approach to deficit reduction. 

I do not pass on whether the most intelligent program cuts are being made, but assume they are the most prudent that can be agreed and still protect the programs and people they were meant to serve.  Whether its eliminating loopholes and deductions favoring the wealthy, or increasing their tax rates, and whatever the nature of the cuts and the pain involved, the questions I raise involve the impact on the recovery, the likelihood of dampening the recovery and extending the recession. That is my focus. I know that raising rates on high income people now and later reforming the code by removing deductions, reducing the rate structure, and broadening the base would likely be the President's preference, as would social program reform that makes them more cost-efficient and more effective at targeting and providing what is needed for only those truly in need--at least that's what I hope is his preference.

But when I look at what I understand to be the general contours of the best approach available to Obama, it appears to be increasing taxes by closing loopholes on only the very well heeled, both corporate and individual, those with the means to continue to consume, regardless of taxes, and arguably having the least impact on consumption and economic recovery. As to the program cuts, they appear to be scheduled so that they take effect more in future years, which again would appear to produce less of a dampening effect on today's economy.

Am I right to feel that is a good compromise in moving toward significant improvement in the budget deficit, but with limited negative impact in the short-term on a fragile economy? I hope so, but I don't really know enough to be sure. Maybe it isn't yet time for material reductions in social programs or increases in taxes. That's where I was a year or so ago, but have been moved by all the lofty voices and dire warnings moving us in the other direction. Might we be making the mistake of 1937, when anti-stimulative measures created the recession within the depression--in our case, the so-called "double-dip" recession? How is a practical person to find the necessary economic information, the reliable voices of professional wisdom, the balanced political leaders, that offer a principled basis for a position to support?

So, yes, I still have questions--important questions, I think. And I still can't find satisfying answers. And better answers, more authoritative answers could clearly change whether I support one deficit reduction plan over another, how much the timing and targeting of budget changes matter, or whether I believe it is even yet time for deficit reduction. 

Of course, by now I understand I am looking to put too fine a point on the analysis and projections that can be produced. They look and sound very sophisticated--and they are--but are still very much the instruments of estimates and general direction, and insufficient for my purposes. In the end, there remain reliable, consistent general principles--to be sure--and a lot of data, but of limited applicability and reliability in defining the structure and timing I'm looking for. In the end, those individuals with the deeper institutional knowledge, the clearer understandings of history, and the more gifted professional intuition will have to guide us. But I wonder if their voices are being heard at all above the din of Right Wing ideological zealotry.

Confucius Says

I'm reading Henry Kissinger's new book, On China, and so far it has not disappointed. Discussing the singularity of China, Kissinger introduces the profound influence of Kong Fuzi (or Kong Zi)--Confucius, to the Western world. This ancient philosopher (551-479 B.C) of Chinese society, government and leadership, developed his ideas during an era of political and social upheaval, and they have remained at the heart of China's identity and notions of social and political stability for the 2500 years since, notwithstanding the Communist and Cultural Revolutions.

Included in the discussion is a representative quote from Confucius that spoke to me; I hope it speaks also to you.

[L]ove of kindness, without a love to learn, finds itself obscured by foolishness. Love of knowledge, without a love to learn, finds itself obscured by loose speculation. Love of honesty, without a love to learn, finds itself obscured by hurtful candor. Love of straightforwardness, without a love to learn, finds itself obscured by misdirected judgment. Love of boldness, without a love to learn, finds itself obscured by insubordination. And love of strength of character, without a love to learn, finds itself obscured by intractability. 

---The Analects, by Confucius, translation William Edward Soothill (New York: Dover, 1995), 107.

A love to learn, impliedly, better informs and imbues such worthy characteristics with deeper, more pragmatic understandings and thoughtfulness in applying them. Rings true to me.

Civic Duty & "Policy" Fairness: $400b a Year in Uncollected Taxes

On the front page of the The Providence [RI] Journal last Monday (7.4.11) was an article under this heading, "Uncollected taxes cost U.S. over $400 billion [a year]." It was a little ironic that this sad piece of news should command such prominent visibility on the 4th of July, a day set aside to honor Americans' patriotism and individual sacrifice.  

WASHINGTON — At a time when higher taxes or deeper government spending cuts seem to be the only options available to close the gaping federal deficit, going after more $400 billion a year in uncollected taxes should be a no-brainer. But in the nation's capital, the so-called "tax gap" hardly rates a mention in the official discussion of America's fiscal woes. 

[T]he "tax gap" is the difference between the taxes owed and what's actually paid on time. In their most recent analysis, from 2001, the Internal Revenue Service estimated that only about 84 percent of federal taxes were voluntarily paid on time that year, leaving a gross tax gap of $345 billion, or roughly 16 percent, uncollected. Late payments and IRS collection efforts brought in another $50 billion, which cut the net tax gap to $290 billion in 2001. But similar estimates point to a gross tax gap of $410 billion to $500 billion in 2010, said Benjamin Harris, a research economist at the Brookings Institution, a center-left research group.  

"You could go a long way toward solving our budget mess by closing the tax gap, but the problem is, it's not easily closed," Harris said. 

---"Here's a debt reduction plan: Get billions in uncollected taxes," by Tony Pugh, McClatchy Newspapers Washington Bureau (6.30.11)

Apparently, for a lot of Americans, that sacrifice does not include the simple civic duty of paying their fair and lawful share of the cost to support, maintain and protect the country they claim to love and honor so much. They choose not to honor it, not if it involves this particular patriotic sacrifice, this civic and legal duty.

But why is this "tax gap," this legal noncompliance, "not easily closed"? From the article:

In the past 20 years, the U.S. economy has grown more complex, blurring the lines between personal and business income and creating more opportunities for tax scofflaws. Congress limits the IRS budget, and sophisticated tax cheats realize their chances of detection are relatively low. Others say that most who misreport their earnings do so inadvertently because of the complexity of the tax code.  

Better, more targeted IRS enforcement could probably cut the tax gap by 10 percent without any fundamental changes to the IRS, Harris estimates. Cutting the gap further would require more thorough IRS reporting, increased tax withholding and more money for IRS enforcement. 

But the political will to bolster the feared IRS collection apparatus and turn it loose on American citizens just isn't there.

Surely the rest of us who voluntarily pay our full taxes owed have "the political will" to see it done, don't we? What honest taxpayer likes the idea of bearing the burden of those scofflaws--including many very well heeled scofflaws--who would just rather not? And who are these people anyway?

Whether by willful evasion or unintentional mistakes, businesses and individuals that fail to report, underreport or underpay their taxes cause honest taxpayers to pay more — about $2,200 apiece — to make up the revenue shortfall. That basic unfairness erodes confidence in the tax system, which lowers taxpayer morale and, in turn, increases noncompliance. 

The biggest losers are America's wage earners and salaried workers, who pay an estimated 99 percent of their fair tax burden because their taxes are automatically withheld from their pay and reported by a third party, their employers. 

But individuals with business income — mainly self-employed, sole proprietors who get paid in cash — misreport roughly 54 percent of their actual income by either underreporting it, or claiming deductions, credits and exemptions to which they aren't entitled. "This is incredible," Harris said. "You kind of feel like a sucker as a wage earner. Here you are paying taxes because someone else is paying you, but if someone else is getting paid on their own, they pay taxes at half the rate." 

So, just who is it that doesn't have the political will to support correcting this blatant civic injustice? Who has that kind of authority and power? Why, our legislators, of course--and particularly our Republican legislators (although some Democrats, too, have been counted in the effort). Small businesses and the self-employed are a key constituency, after all.

"The government could close the tax gap entirely by putting IRS agents in every family's living room and in every small business. But this is a price that a liberty-loving people and their representatives are rightly unwilling to pay," said Sen. Orrin Hatch of Utah, the senior Republican member of the Senate Finance Committee, which helps write America's tax laws. 

But House Republicans, spurred by the anti-tax sentiment of tea party activists, voted to cut the IRS budget by $600 million in fiscal year 2012, citing the need to cut the budget deficit. IRS Commissioner Doug Shulman told lawmakers that the proposed GOP cuts would cause tax collections to fall by $4 billion because they'd require slashing the agency's enforcement budget. 

But Curtis Dubay, senior tax policy analyst at the Heritage Foundation, a conservative think tank, said Shulman was simply "posturing" to preserve IRS funding. Strengthening IRS enforcement is a mistake, Dubay said, because "the tax gap is not the result of people illegally evading taxes. It's the result of an overly complex tax code that gets more and more complex every day."

And that is the sad and disengenuous rationale offered by the defenders of the status quo, the purposefully misleading statements offered by so-called "conservative" legislators and advocates who appear not only comfortable with existing disparities, but feel it is their role to perpetuate them. So they support a clearly discriminatory taxation reality, a de facto policy of indulging lower taxation for self-selecting, dishonest small businessmen, sole proprietors, and independent contractors, and overburdening honest small businessmen and salaried employees to make up the difference. 

Last spring, I and a very good friend--a small businessman of impeccable honesty and unquestionable civic duty--were discussing the scope of the huge budget deficit and the options for balancing it. Government program reform and cost-effieciency, on the one hand, and tax increases on the other. He surprised me with his deep sense of both fiscal concern and public unfairness.  How could accountable government fail to first assure that everyone and every business was paying their full, legal share of taxes due before demanding more of those who were already fully paying theirs?

I didn't get it. I was talking from a broader view of the issues, taking for granted a tax gap that, however indefensible, would not be remedied in time to play a role in balancing the budget--if it would be remedied at all. He was talking personally, as an honest, accountable taxpayer who expected fairness from government. I was retired and relatively removed from the fray, he was still very much engaged in the challenges of his business. I was talking policy from 20,000 feet, he was talking gut feelings about the fairness of government and the honor of American citizens. And it really upset him. We were really  having two different conversations. And now I realize that his was the more important one.

Click to read more:

http://www.mcclatchydc.com/2011/06/30/v-print/116801/heres-a-debt-reduction-plan-get.html

"No-Brainer": Brooks Laments, Calls Out His GOP Leadership

It was only on June 18 that I posted about David Brooks' concerns with the budget negotiation process--and his call-it-like-it-is assessment of the irresponsibility of both Republicans and Democrats. The President and Democrats appeared to hear or already understand his concerns, and have responded as leaders should in a time of crisis. But not his own Republican Party.

Brooks, the Republican or more "conservative" columnist on the op-ed pages of the New York Times, has now taken it directly to the Republican leadership in blunt, desperate terms. He wants them and the public to fully understand the stakes--for the nation and for the GOP.

I have had old friends and new post or e-mail me about this article, and how it hits right at the heart of their private feelings and concerns, how it affirms their worst fears, as it does mine. And a few of those most thoughtful, well-informed  and accountable friends were, like me, once moderate Republicans (fiscal conservatives, social progressives, as one put it). But for most of the last decade they have necessarily become Independents as a matter of principled conviction or default. Perhaps more than others, they lament the state and radical dysfunction of today's GOP leadership.

Here, Brooks' full article, "The Mother of All No-Brainers," NYT (7.4.11): 

The Republicans have changed American politics since they took control of the House of Representatives. They have put spending restraint and debt reduction at the top of the national agenda. They have sparked a discussion on entitlement reform. They have turned a bill to raise the debt limit into an opportunity to put the U.S. on a stable fiscal course.  

Republican leaders have also proved to be effective negotiators. They have been tough and inflexible and forced the Democrats to come to them. The Democrats have agreed to tie budget cuts to the debt ceiling bill. They have agreed not to raise tax rates. They have agreed to a roughly 3-to-1 rate of spending cuts to revenue increases, an astonishing concession.  

Moreover, many important Democrats are open to a truly large budget deal. President Obama has a strong incentive to reach a deal so he can campaign in 2012 as a moderate. The Senate majority leader, Harry Reid, has talked about supporting a debt reduction measure of $3 trillion or even $4 trillion if the Republicans meet him part way. There are Democrats in the White House and elsewhere who would be willing to accept Medicare cuts if the Republicans would be willing to increase revenues.  

If the Republican Party were a normal party, it would take advantage of this amazing moment. It is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases. A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.  

The party is not being asked to raise marginal tax rates in a way that might pervert incentives. On the contrary, Republicans are merely being asked to close loopholes and eliminate tax expenditures that are themselves distortionary.

This, as I say, is the mother of all no-brainers.  

But we can have no confidence that the Republicans will seize this opportunity. That's because the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative. The members of this movement do not accept the logic of compromise, no matter how sweet the terms. If you ask them to raise taxes by an inch in order to cut government by a foot, they will say no. If you ask them to raise taxes by an inch to cut government by a yard, they will still say no.  

The members of this movement do not accept the legitimacy of scholars and intellectual authorities. A thousand impartial experts may tell them that a default on the debt would have calamitous effects, far worse than raising tax revenues a bit. But the members of this movement refuse to believe it.

The members of this movement have no sense of moral decency. A nation makes a sacred pledge to pay the money back when it borrows money. But the members of this movement talk blandly of default and are willing to stain their nation's honor.  

The members of this movement have no economic theory worthy of the name. Economists have identified many factors that contribute to economic growth, ranging from the productivity of the work force to the share of private savings that is available for private investment. Tax levels matter, but they are far from the only or even the most important factor.  

But to members of this movement, tax levels are everything. Members of this tendency have taken a small piece of economic policy and turned it into a sacred fixation. They are willing to cut education and research to preserve tax expenditures. Manufacturing employment is cratering even as output rises, but members of this movement somehow believe such problems can be addressed so long as they continue to worship their idol.  

Over the past week, Democrats have stopped making concessions. They are coming to the conclusion that if the Republicans are fanatics then they better be fanatics, too.  

The struggles of the next few weeks are about what sort of party the G.O.P. is — a normal conservative party or an odd protest movement that has separated itself from normal governance, the normal rules of evidence and the ancient habits of our nation.  

If the debt ceiling talks fail, independent voters will see that Democrats were willing to compromise but Republicans were not. If responsible Republicans don't take control, independents will conclude that Republican fanaticism caused this default. They will conclude that Republicans are not fit to govern.  

And they will be right.

Link to article in NYT:

http://www.nytimes.com/2011/07/05/opinion/05brooks.html?_r=2&hp

Disruptive Innovation: Re-Shaping American Higher Education ?

Examining the traditional universities through the lens of innovation, we see that a muddled business model is causing the industry's ruinous cost increases. For decades now, these institutions have offered multiple, concurrent value propositions: knowledge creation (research), knowledge proliferation and learning (teaching), and preparation for life and careers. They have as a result become extraordinarily complex—some might say confused—institutions where significant overhead costs take resources away from research and teaching. A typical state university today, for example, is the equivalent of a three-way merger of the consulting firm McKinsey—focused on diagnosing and solving unstructured problems; the manufacturing operations of Whirlpool—which uses established processes to add value to things that are incomplete or broken; and Northwestern Mutual Life Insurance Company—in which participants exchange things to derive value: fundamentally different and incompatible business models all housed within the same organization.  

Meanwhile, rival organizations using online learning in a new business model focused exclusively on teaching and learning, not research—and focused on highly structured programs targeted at preparation for careers—have benefited from a significant cost advantage and have been able to grow rapidly.

---"Colleges in Crisis: Disruptive change comes to American higher education, " by Clayton M. Christensen *and Michael B. Horn*, Harvard Magazine (July-August 2011)

That was also my conclusion, more-or-less, a decade ago when first confronted with the issues that suggest so strongly an unsustainable business model for traditional higher education. As many of you know, while a corporate tax-financial executive, I served in leadership roles on education-related boards and councils. In time, I concluded that today's education issues were more important than what I was doing professionally. I left my corporate post and enrolled in a doctoral program in higher education policy. Then the learning began.

It soon became apparent to me that so much of what had been learned in the business world was dismissed as inapplicable in American higher education. But the confusion of the university business model for the conglomeration of research, teaching, and other educational functions across a range of colleges and professional schools has been made apparent by decades of unsustainable increases in costs and tuition. It is hard not to conclude that there is an inherent cost-inefficiency in the traditional higher education model--and that it cannot deliver competent educational outcomes at an affordable price to the more economically constrained, but growing, middle- and lower-income American student populations, traditional or nontraditional. 

So, I was hopeful, at least, about the role and influence of the no-frills, for-profit colleges, even if most were oriented toward professional education, even if most appeared relatively insubstantial or rough around the edges. But I was not at all convinced that on-line courses and learning would form the foundation for an effective higher education model that could replace the one failing today. I didn't see it soon evolving into the kind of "disruptive innovation" the article's authors describe. (Perhaps it's just that I embrace so warmly the joys of my traditional college classroom experience, and have difficulty relating to education without classrooms.)

Mssrs. Christensen and Horn lay out the problem first in broader terms:

Despite a long track record of serving increasing numbers of students during the past half-century, graduation rates have stagnated. A higher proportion of America's 55- to 64-year-old citizens hold postsecondary degrees than in any other country—39 percent—but America ranks only tenth in the same category for its citizens aged 25 to 34 (at 40 percent). And none of America's higher-education institutions have ever served a larger percentage of its citizens—many from low-income, African-American, and Hispanic families. 

Indeed, the quality of America’s colleges and universities has been judged historically not by the numbers of people the institutions have been able to educate well, regardless of background, but by their own selectivity, as seen in the quality and preparedness of the students they have admitted. Those institutions that educated the smartest students, as measured by standardized tests, also moved up in the arms race for money, graduate students, and significant research projects, which in turn fueled their prestige still further, as faculty members at such schools are rewarded for the quality of research, not for their teaching.

And yes, I do understand if that were the extent of the higher education problem, we would be having a different type of change discussion. But the authors then address the more threatening underlying issues and failures:

More fundamentally, the business model that has characterized American higher education is at—or even past—its breaking point. Many institutions are increasingly beset by financial difficulties, and the meltdown since 2008 is but a shadow of what is to come. Undergraduate tuition has risen dramatically: at a 6.3 percent annual clip for nearly the last three decades—even faster than the much-decried 4.9 percent annual cost increases plaguing the healthcare industry. The full increase in the price of higher education has actually been hidden from many students and families over the years because gifts from alumni, earnings from private university endowments, subsidies from state tax revenues for public universities, and federal subsidies for students have been used to mitigate some costs. But universities are exhausting these mechanisms... 

During the past 15 years, state-supported schools have been shifting the burden of tuition to students and their families, who were initially shielded from the consequences because, as noted, aid had increased so rapidly that the net price to students fell, on average. But those offsetting government dollars have not kept up of late. State universities, feeling the budget crunch, have resorted to all sorts of devices to try to stay afloat—including cutting back the number of students they enroll at the very time the country needs more of its population educated. Severe government budget crises have only exacerbated the trend of shifting the costs of higher education to students and their families, a shift that is likely to become far more intense in the future because of the enormous obligations that federal, state, and local governments face in funding the pension and healthcare costs of their current and retired employees—as well as aging baby boomers.

Many of us understand all that too, don't we. Its certainly nothing new to those who have been dealing with higher education as students, parents, university administrators, legislators, and yes, taxpayers. Increasing numbers of books, articles and TV reports have been written or produced about one aspect or another of troubling indicators over the last couple decades. But no one appears ready to seriously tackle the issue, including most of all the higher education institutions themselves.

So yes, I left my higher education studies skeptical about the likelihood of substantive change initiatives at traditional universities themselves. Although some were experimenting with "on-line" learning, they were limited, complementary applications or marginal ventures unthreatening to the universities base educational model and enterprises. But that appears to be changing, at least in some institutions--because it must. Messrs. Christensen and Horn piqued both my interest and excitement with their observations of how change is being forced on many institutions of high education by what they call "thriving disruptive innovation."

Just at the moment when these challenges to established higher education have arisen and compounded, another group of universities has arisen whose financial health is strong and enrollments have been booming. And yet the brands of these schools are weak and their campuses far from glamorous; sometimes the campuses are even nonexistent from the perspective of students, as online learning has largely driven their growth. How could this upstart group be so successful when the rest of higher education is treading water at best? 

The success of these online competitors and the crisis among many of higher education's traditional institutions are far from unique. These are familiar steps in a process known as "disruptive innovation" that has occurred in many industries, from accounting and music to communications and computers. It is the process by which products and services that were once so expensive, complicated, inaccessible, and inconvenient that only a small fraction of people could access them, are transformed into simpler, more accessible and convenient forms that are also, ultimately, lower in cost. We are seeing it happen more rapidly than one could have imagined in higher education, as online learning has exploded: roughly 10 percent of students took at least one online course in 2003, 25 percent in 2008, and nearly 30 percent in the fall of 2009. 

What is exciting about this emerging reinvention it that it has significant potential to help address the challenges facing American higher education by creating an opportunity to rethink its value proposition—its cost and quality... 

When America's traditional universities arose, knowledge was scarce, which meant that research and teaching had to be coupled tightly. That is no longer the case. Today, the Internet is democratizing people's access to knowledge and enabling learning to take place far more conveniently in a variety of contexts, locations, and times. 

Online education can effect the transformation not only of curriculum but also of learning itself. Judging it by the metrics used to govern the old system is both inappropriate and limiting (as is true of all disruptive innovations). Online learning allows education to escape from the focus on credit hours logged and "seat time" in classrooms to new standards that tie progress to students' competency and mastery of desired skills. [But] although this transition has begun, much of online learning's promise for higher education is still on the horizon.

But can on-line education really arise to the heft and impact necessary for this "disruptive innovation"  to materially change American higher education? Can it force the cost-efficiency, educational outcomes, and affordability in higher education that America now desperately needs ?

The emerging online universities fit the pattern of a disruptive innovation for higher education. Not only did they get their start as simple products and services, they started by serving those who were overlooked by or could not access the typical colleges and universities—by making education far more convenient. Now online learning is beginning to improve and serve more demanding customers. But this transition is still early, and the country's higher-education policies have incentivized little of this transformational behavior: government policies have continued to emphasize access to a higher education regardless of quality and true cost, which has held back the evolution. 

This suggests a clear path forward for policymakers and stakeholders looking to reinvent American higher education—to realize real gains in cost and in student learning of essential skills. Their goals should be to embrace the disruptive innovation, to focus on new measures to judge its quality, and to encourage innovation driven by improving student outcomes and lowering overall costs.

And what does this mean for existing higher education institutions, those who embrace it more, and those who embrace it less?

Typically, the existing and established players in a sector do not survive battles of disruptive innovation; upstart companies utilizing the disruption upend them. Rather than recognize these disruptive innovations as exciting new opportunities, the established players characteristically regard them as mere sideshows to their core operations. Predictably, the majority of universities have taken this same defensive stance and so have done little to adopt this disruptive innovation and to reinvent themselves. 

This stance exposes an even more significant problem that is forcing many American universities outside the top institutions to the brink of collapse. Although some traditional universities have used online learning as a sustaining innovation—in effect disrupting their individual classes—almost none have used it to change their business model in any significant way. Whenever we have seen a disruptive innovation reinvent a sector, change has resulted from the joint action of a new technology and an accompanying new business model. But cost increases and an increasingly broken business model—reliance on ever-rising tuition, more endowment income or government support, and research funding, all wrapped up in expensive physical campuses with large support staffs—continue to plague much of higher education... 

This is a hopeful story for America, and there is even a potential silver lining for many of the existing institutions of higher education, too. Our studies reveal that incumbents sometimes survive and thrive amid disruption—in every case, because they are able to create independent divisions, unfettered by their existing operations, which can use the disruption inside a new business model that reinvents what they do.

If it is a hopeful story, it is also a necessarily unsettling and painful one, one that indicates more the replacement of today's traditional education institutions than their change or reform. I wish that did not have to be so, but it probably must. If only a small number of businesses find the strength and resolve to venture in the direction of remaking themselves when they must--and do it successfully--it is hard to expect that very many universities will.

And as business has learned, success will depend on restructuring and incorporating the most effective innovations and practices to achieve cost-efficent, high quality services. We could therefore expect to see fragmentation of the larger university divisions to achieve the necessary focus on competence, cost reduction, and required outcomes. There will likely be different avenues available for a range of educational needs, competent ones with successful outcomes at different price points--depending on how broadly one wants to define the educational experience, and how much one is willing to pay for it. Residential? Social? Athletic? Entertainment? Advanced facilities? Or, increasingly,  just the basics, please, just the wanted or needed outcome, available when, where, and how I can fit it into my life and make it work for me. Which means on-line, at home or work or wherever. And that will likely provide the educational life raft for much of America in the future, for the rapidly increasing numbers of students and families for whom today's traditional higher education experience is too costly and inconvenient to be a reasonable choice.

So, does all that make sense? Is this the new, more diverse and effective higher education landscape now starting to form, even if most of us can't yet see the scope, contours or details of how it is changing?

Unaddressed was the re-forming of research institutions, with or without doctoral studies programs. Johns-Hopkins was originally a research and graduate studies institution; might it and other doctoral divisions return in some fashion to those roots? And what of the venerated liberal arts college, which is also burdened with a notable measure of the same cost-inefficiencies universities suffer? What form will tomorrow's liberal education in the humanities, arts and sciences take; who or what will constitute its market; and where will its champions be found?

As the authors made clear, we are just in the early stages of this process. But the pace of the process will likely be forced to quicken as the increases in cost and tuition at colleges and universities continue unchecked--and the greater demands of America's public, economy, and government policies continue unmet. But no one yet appears able to see just how it will all unfold, the timing, or exactly what it all will look like when all the change has had its way. Still, if you sense authority or prescience in this article, then expect to see these kinds of changes occur more visibly and at an increasing rate, as we also see an increasingly troubled and failing traditonal higher education model.


[*Clayton M. Christensen, M.B.A. '79, D.B.A. '92, is Cizik professor of business administration at Harvard Business School. Michael B. Horn, M.B.A. '06, is the co-founder and executive director for education of Innosight Institute, a nonprofit think tank devoted to applying the theories of disruptive innovation to problems in the social sector. Christensen and Horn are the coauthors, with Curtis W. Johnson, of Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns.]

Read more:

http://harvardmagazine.com/2011/07/colleges-in-crisis?page=all

Markets Serve Society's Broader Interests First, Not Goldman's

Naples friend Marc Schulman sent me this 2010 global economics report from Goldman Sachs. Marc was a highly regarded Wall Street analyst in his working career, and so understands full well the nature, conflicts and contradictions inherent in the voices and actions of Wall Street's investment bankers. And foremost among them, both as voice and player, is Goldman Sachs. The report's summary:

• In response to the largest post-war recession, OECD governments have run up record peacetime budget deficits. While deficit spending was the appropriate response to an unprecedented crisis, correcting these imbalances is now a critical challenge for economic policymakers.

• Empirical evidence is equivocal about the appropriate size of government in the long run. But history does provide guidance as to how governments can correct large fiscal imbalances, while protecting economic growth.

• In a review of every major fiscal correction in the OECD since 1975 [which are hardly comparable to our current situation], we find that decisive budgetary adjustments that have focused on reducing government expenditure have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond and equity market outperformance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging for growth. [Emphasis and comment added.]

• The trade-off between withdrawing the stimulus too soon (and threatening the economy’s nascent recovery) and delaying the correction (and threatening a debt crisis) largely disappears when severe fiscal imbalances are corrected through reduced government expenditure.

• Our results are robust to controlling for prior economic conditions that might otherwise explain growth differences. They are also consistent with the findings of previous academic work in this area.

• That said, decisive expenditure-driven fiscal adjustments are politically difficult to implement and tend to take place only following a change in government and/or once bond markets force the government’s hand.

---"Limiting the Fall-Out From Fiscal Adjustment," [Summary Outline], Global Economics Paper No: 195, Goldman Sachs (4.15.2010)

I had my share of experience with investment bankers in professional life, including Goldman Sachs. They were probably the best at what they did, certainly the most influential. But while I had a grudging respect for them, I never trusted them--especially with respect to M&A and their so-called "innovative" products. Now, after the mortgage-backed securities debacle, I neither respect them nor trust them, and they carry little credibility with me. That extends to their market and economic reports as well. Surely we understand that the reasons investment bankers publish any kind of market or economic report for clients or potential clients--and for public decision makers, to be sure--is first to support or help create the most accomodating short- to intermediate-term environment for them and their profit profile.

Wall Street repeatedly demonstrates that they believe that society and government exist first to support strong markets, the sine qua non of the modern Western state. That's just how they are co-opted into thinking. They are neither inclined nor can afford to think otherwise. While the Goldman report above does acknowledge the political unlikelihood of balancing the budget by severely defunding essential public goods like Social Security, Medicare, Medicaid and others, it is quite clear that they advocate that result, were it possible. And they would reduce or hold constant the historically low tax burden of those most able to contribute, their clients and themselves, the wealthiest Americans. More money in the hands of the weathy is always their best prescription for America's economic and societal health. But most troubling, they appear to ignore or not recognize the broader societal impact of that policy approach, and the longer-term economic harm also done.

Even though healthy markets are essential as the economic engine of society, those markets, like government, exist first and only to benefit society as a whole and its broader interests, and in the process people individually. And the best interests of society (and long-term markets) are served by government that provides as well as possible for the education, health, infirmity and old age of its citizens. The future of markets and society depend increasingly on capable human labor and intellectual capital, and the condition of social stability. And those conditions depend on the continuing, even improving, provision by government of those public goods. And so, the full potential of markets and the economy have to take second place to first considering how they will best serve society and its interests. Amen.

Just my view on government and societal priorities, of course. But you would look in vain to find any substantial concern expressed by Goldman for such things. Rather, their approach would assure the most damage to these essential public goods. 

Now, I hasten to concede that were our economic and budget challenges to devolve into a situation like Greece--one of soverign insolvency on the edge of economic and societal failure--then the resolution of debt issues necessarily become the first interest of society. Then, we're talking the conditions of societal survival. And all must bear the pain and price of rebuilding--including the unavoidable damage to society's public profile and progress. Even in our current, less threatening condition, more pain and a price must be borne by all, both in terms of social programs and taxes. But we are not yet in such dire straits that we need resort to the wholesale sacrifice of our short- to intermediate-term social support programs and the development of human capital needed for the long-term future of our society and economy. Thorough need- and means-based reform, focus, and cost-efficency are still our more reasonable choices, if we have the wisdom and sense of political will to act timely on that.