Tuesday, February 26, 2013

#Sequestration and all the things it does not accomplish

It appears that sequestration will happen. Our politicians have made the decision to test the markets and the voters, and simply walk away. Serious negotiations should have concluded a year ago, but were swept under the rug by electioneering on both sides.

Obviously, the agencies are working very hard to take make headlines of these cuts. Cancelled carrier deployment, long lines at airports... let the drama begin. One might think that responsible administrators would try to work with the cuts and minimize ill effects, but no! This is the theater of the day.

Because sequestration will not occur within the context of an overarching fiscal plan, the cuts are disruptive by design- i.e. there is no strategy to mitigate ill effects. Moreover, the ten year program of cuts can be stopped or even reversed at any moment, so there is no real commitment to rein in spending. Sequestration is not a real strategy to cut government spending; it's designed to be a political scare tactic and nothing more.

The cuts that really need to happen will not happen. Sequestration will not dial down production of hyper-expensive fighters; it won't reduce agricultural subsidies; it won't take one tentative bite out of the fat at the Department of Education and other agencies that have run off the rails for decades; it won't fight the rising cost of health care; and it certainly won't set our entitlement spending on a sustainable path. 

Sequestration is not some principled Coolidge-era shift of economy from public to private; there's nothing being shifted at all and there is no strategy on either side to accomplish that. Instead we'll have just small, disruptive cuts designed for partisan headlines. And those cuts truly add up to peanuts in terms of total federal spending.

Imperfect though it may be, the Simpson-Bowles plan has been on the table for years and could easily lead us out of this silliness, with responsible cuts of significant magnitude.

I guess I just have to hope that the next election is as anti-incumbent as I dream.

P.S. This informative blog post by Rick Newman shows, in good detail, what sequestration does and does not do:

Rick Newman / US News & World Report : Charts reveal likely sequestration effects

Friday, February 15, 2013

#UVa CS Cuts Reveal Lack of Science & Engineering Strategy

The University of Virginia engineering school just announced that it will restrict admissions to its Computer Science (CS) majors and minors programs. This being done not to improve selectivity... but because the engineering schools lacks the faculty to deliver the courses:


Sadly, the faculty declines were easily forseeable; I and many other faculty raised concerns many years ago. And the response to Commonwealth cutbacks, post 2008, was simply to pile on more students. There was no commensurate increase in investment in faculty.

These and related developments at UVa have been painful to watch. The University truly  has ~zero strategy within the science and engineering departments to address declines in faculty numbers, salaries, and morale. Most galling, UVa leaders appear complacent due to favorable undergrad rankings... but those are strongly backward-looking and give little indication of where an institution is headed.

The great irony, of course, is that CS is a very marketable degree... it delivers one of the very highest returns on educational investment in all of STEM:


UVa should take a hard look at what UConn is doing, with its strategic faculty expansion:


And then there is Connecticut's $1.5 Billion commitment to STEM:


...which, in light of the recent UVA Board fracas, begs the obvious question: would it even be possible for UVa and the State to work together toward such an important investment?

Unfortunately, UVa's CS department is certainly not alone in struggling with insufficient faculty resources. The Chemical Engineering department and several others are barely able to support student needs, and the undergraduate thesis program has been greatly diluted in recent years due to declining faculty resource and involvement.

Wednesday, February 13, 2013

On the Subject of Financial Transaction Taxes #FTTs to Fund Education

Recently, there has been some discussion in higher ed circles about applying financial transaction taxes (FTTs) to stock trades and using the proceeds to fund education.

I dislike this idea for many reasons.

It is apparent that FTTs tend to reduce liquidity and force investors into fewer but larger and more bundled trades, which of course tends to increase volatility. This is quite the opposite of what original proponents thought FTTs might do. And in a marketplace as active as that in the US, investors will simply clear their trades elsewhere. Like maybe on an offshore oil platform...

We need to bear in mind that the main reason why people are even considering FTTs in the U.S. right now is because of the rise of concerns with regard to high frequency trading (HFT). The simple(istic) idea is that the taxes could function as a sort of knob to control trading frequency. But the real culprit for the flash crashes is algorithmic trading, not HFT per se, and there is a big difference. Moreover, there should be more focus on 'circuit breaker' approaches to prevent flash crashes. In any case, this discussion is still very active and the case is certainly not closed i.e. there is no consensus that FTTs would actually improve the situation.  They could actually make it worse by amplifying volatility.

All that aside, what most annoys me about this proposal is that it not only raises big technical concerns but also appears to violate some basic principles: 

(1) We desperately need a much simpler tax code that is far easier to administer. The current code is hideously complex- so much so that the amount of tax you can avoid is proportional to how many lawyers and accountants you can afford. The code is so complex that most of us don't even know what our effective tax rates are. We need a much more efficient tax code, and this proposal would be a big misstep in the opposite direction. And note, it wouldn't have any effect at all on the largest investors who move the most capital- they have many ways around it. If the cost is significant, I guarantee that large investors will simply clear their trades outside US jurisdiction. It's the small investor who would be disproportionately affected. 

(2) I really don't like the idea of having tax sourced and revenue spent in two widely different compartments of the economy. For example, what might makes sense is to have a gas tax that generates revenue to fund road maintenance and better technology to reduce fuel consumption and pollution. That would make sense, and it might even makes sense to opponents of higher taxes... once they are confronted with declining road quality. In other words, we should try to keep costs and consequences as close together as possible, so that it's clearer to voters that they get what they pay for. Ah, transparency! What doesn't make sense is to link two wildly different things e.g. the volatile equities marketplace... and education. The latter is all about low-risk, ultra-stable, predictable, long-term (lifetime) investment. There is an inconsistency of logic. 

(3) The idea that politicians might try to increase funding for something -even education-without actually declaring that to be their intention is totally unacceptable to me. If you want to increase funding for higher ed then say so... transparently. Hiding it behind some abstract tax that is easy for the wealthiest investors to evade and which can have consequences that most people don't even understand, that is irresponsible politics. It's deliberately obfuscatory politics. This is the same nonsense that disturbed me with regard to proposals to fund education via lottery revenue. Frankly, I could care less whether we have lotteries or not- it's a fools tax that I'll never pay anyway. But if a competent politician looked me in the eye and articulated why I need to dig a bit deeper into my pockets to help educate our young people, well then I would support a higher tax. And, like most Americans, I am very bothered that no politicians are stepping up to the plate to articulate the need for better policy and more investment in our kids' preparation.