If you're reading this blog, you probably didn't fail a lot of classes in school.  But I bet that you've totally forgotten a lot of those classes.  I got A's in junior high and high school Spanish, but barely speak a word of it.

Now ask yourself this:

How would your career have been different if you had failed all the classes you've totally forgotten?

According to the human capital model, failing (i.e., never knowing) course material should have exactly the same career consequences as forgetting (i.e., no longer knowing) course material.  Either way, you lack the skills - and the labor market should treat you accordingly.

According to the signaling model, in contrast, the consequences of failing and forgetting can totally diverge. When you fail to learn useless material, you send a bad signal.  When you demonstrate mastery of useless material, you send a good signal - whether or not retain what you learned.  Employers naturally snub people who fail, yet smile upon those who merely forget.

Take me.  If I'd failed Spanish, I couldn't have gone to a good college, wouldn't have gotten into Princeton's Ph.D. program, and probably wouldn't be a professor.  But since I've merely forgotten my Spanish, I'm sitting in my professorial office, loving life.

How about you?  How would your life have been different if you had failed all the classes you've totally forgotten?

I heard a rumor that a famous economist was asking about my book in progress, The Case Against Education.  So I sent him the following email:

---

I heard you were asking about me at the GMU dinner earlier this week.  I am indeed working on a book defending the empirical importance of the signaling model of education.  I'm happy to discuss my project at length, but here's the short version:

1. The vast majority of research on the return to education - including IVs, RTCs, etc. - does not empirically distinguish between human capital and signaling.  The better papers explicitly admit this.

2. Students spend a lot of time learning subjects irrelevant to almost all occupations (except, of course, teaching those very same irrelevant subjects).

3. Teachers often claim that they're "teaching their students how to think," but this goes against a hundred years of educational psychology's Transfer of Learning literature.

4. When education researchers measure actual learning, it's modest on average, and often zero.  And yet employers still pay a big premium to e.g. college students who've learned little or nothing.  The same goes for the return to college quality.  It doesn't seem to improve learning, but it substantially improves income.

5. There is a growing empirical literature using the El-SD (employer learning - statistical discrimination) approach to measure the effect of signaling.  It usually finds moderate signaling, at least for non-college grads.  It looks like you have to finish college to quickly get employers to reward you for measurable pre-existing skills.

6. The sheepskin literature finds large effects of merely finishing degrees.  They eventually fade out, but it takes 15-25 years.  This isn't iron-clad evidence for signaling (what would be?), but it's strongly supportive.

My book will also argue that ability bias is a much bigger problem than the David Card consensus will admit, and that the positive externalities of education are overrated.  So the social return to education turns out to be quite low.  In terms of policy implications, I'm going to argue for large cuts in government spending on education, and a lot more vocational education on the German model.

The resource page for last week's Caplan-Smith debate is now up, complete with full video.  Here's Karl's post-debate statement.  It's basically a more detailed version of his original statement.  But he does introduce two new points I want to answer:

1. Genetic determinism.  Here's Karl:

As it happened I was also debating Bryan Caplan, who I thought and still think, would admit that one's actual level of conscientiousness is probably genetically determined. And, further that this personality attribute underlies most of what the normal world would call "laziness."

Actually, I've explicitly disavowed genetic determinism for any interesting behavioral trait.  So does every behavioral geneticist.  The proof is simple: if genetic determinism were true for any trait X, identical twins would have exactly the same value of X.  They almost never do.  Conscientiousness is a case in point; heritability estimates are typically 40-60%.  None approaches 100%.

In any case, genetic determinism is a red herring.  You could just switch to a "genetic + environmental determinism" hybrid view, then reiterate Karl's fundamental position.  Which brings us to:

2. Free will.  Karl:

[I]f one is sympathetic towards those born blind does it not follow that one should be sympathetic towards those born lazy?

Now, that having been said I recognize that there will be a huge visceral aversion to this line of reasoning. And, so I want to do what I can to calm that aversion.

My point was that the reason we feel so differently about disabilities like blindness as opposed to disabilities like laziness, is that its really difficult to fake being blind. Thus there is much less concern that the blind person is taking advantage of you by lying about their blindness.

Its much more difficult to confirm laziness. So much so that people are hesitant to think of it as not a innate property of the person at all. However, our psychological research strongly suggests that this is not true.

But laziness is totally different from blindness: laziness is a choice, and blindness isn't.  Karl ably explained my reasoning during the debate: Laziness, unlike blindness, responds to sufficiently extreme incentives, and something can only respond to incentives if you are able to do otherwise. 

Consequentialists naturally tend to misinterpret this statement as saying, "We should punish laziness in order to reduce laziness."  But my point is about philosophy of mind, not policy.  The responsiveness of laziness to incentives shows that being lazy is a choice.   

Of course, you could just bite the bullet and insist that what appear to be choices are never "really" choices.  But that goes against all mental experience, and should be dismissed as absurd.

One last point: Many people (Scott Sumner among them, I fear) would be tempted to complain that I stubbornly cling to whatever moral intuitions I deem to be "obvious," while Karl actually tries to prove his moral conclusions.  My reply: Karl rests all of his moral conclusions on a single utilitarian premise.  And what is that premise?  If you say, "Just another intuition," you're being generous.  The utilitarian intuition is a paper tiger, subject to a long-standing list of devastating counter-examples.  Utilitarians' standard replies are to (a) change the subject by denying the empirical importance of the counter-examples, and (b) dogmatically accept every absurd implication of their view while criticizing the "dogmatism" of everyone who demurs.  If this isn't ridiculous enough, utilitarians proceed to continuously violate their own ethic by failing to spend all their spare resources on desperate strangers.

I'm not saying that human happiness isn't morally important.  I'm saying that human happiness is one morally important thing on a long list of morally important things: desert, justice, honesty, achievement, truth, beauty, and liberty are merely the beginning.  The only way to weigh them against each other is with clarifying examples and reflection.  Morality would be a lot simpler if utilitarianism were true.  But it's better to be broadly right than simply wrong.

The event was billed as a debate Are Libertarians Part of the Conservative Movement? And, yes, both speakers talked about reversing the question.

The format consisted of 4-minute opening statements followed by one-minute responses to questions. It makes for lively entertainment, but not so much for serious discussion. Welch and Goldberg mostly played it mostly for laughs, which is all that the silly format really allowed.

1. Welch was optimistic that Republicans were willing to compromise with libertarians (he cited Jim DeMint's recent outreach efforts, not all of which are on the record.)

2. Both assumed that Mitt Romney will be the Republican nominee, thereby ducking the question of how libertarians might respond to a Santorum candidacy. Is there daylight between Santorum's brand of conservatism and W's? I would like to have gotten an informed answer, but no one asked the question.

3. Welch said that the demographics of Republican primary voters and caucus-goers is skewing very old. I am wondering if 2012 will be the swan song for voters born before 1960. I still think that the future of the Republican Party looks very dim. The last time a Republican establishment candidate suffered a meltdown during the nomination campaign, it did not turn out well for the GOP.

4. Welch and Goldberg took the view that the cascading U.S. debt will drive libertarians and conservatives into one another's arms, just as the Cold War battle with Communism did. I wonder how they would react to the conversation with Garett Jones, who believes that the debt problem will only be solved by a Democratic victory.

5. Both agreed that immigration is an issue where some libertarians (e.g., Ron Paul) and many conservatives take a stance that is more hostile to immigration than is morally or politically wise overall. But I would say they are overlooking the stridency of the Republican base on the issue. They make it sound as though it is an accident that the Republican candidates are not playing up the benefits of immigration. But I would say that this is where the influence of the Tea Party is decidedly not libertarian.

6. Welch tried to say that the Occupy movement has a healthy opposition to bailouts, but Goldberg was having none of it. His line was that the Occupiers are not opposed to bailouts; they just want to get their own bailouts, rather than have the money go to Wall Street. I tend to agree with Goldberg--I think you are kidding yourself as a libertarian if you think that shared opposition to bailing out Wall Street is the basis for some sort of alliance.

7. Goldberg made at least two other points that I appreciated. The first one is that "the libertarian in the room asks the right question: Why is this a job for government?" Without the libertarian in the room, I would say that the question does not get asked.* The second one is that politicians always are a disappointment to their supporters. If nothing else, the pressure to win votes limits their ability to stick to principles.

*What I would say (Goldberg put it differently) is that without the libertarian in the room to question the role of government, the conversation proceeds more along the lines of the joke, "Something must be done. This is something. Therefore, it must be done."

[update: Glenn Reynolds has two related links.]

Below is an excerpt from a video conference with Michael Greve, Reihan Salam, and me on the problems with fiscal federalism in practice. The full half-hour video is here. And, yes, I also created a podcast.

It is a good discussion, but quite depressing. A naive view of federalism is that it encourages robust competition at the state and local level. Unfortunately, the reality is that competition gets suppressed, and the incentives are rigged in favor of government expansion.

Interviewed by Reihan Salam and me. The thought he expresses below is that online innovators will offer credentials that are initially inferior to college degrees but which will ultimately become superior. The analogy would be with Japanese cars, which initially were considered inferior because they were cheap. However, when people noticed that their Toyotas and Hondas were lasting longer than their Fords and Chevys, the status of Japanese cars increased.

Reihan has some post-interview thoughts, including:

At the very least, colleges and universities should be required to release data on whether or not students demonstrate a significant improvement in learning between enrollment and graduation -- and if they don't, they should be barred from receiving federal student loan money.

Full half-hour video here. Of all the video discussions I have recorded so far, I thought this was the liveliest. Comments welcome.

[UPDATE: podcast version.]

I'm baffled by people who blame declining marriage rates on poverty.  Why?  Because being single is more expensive than being married.  Picture two singles living separately.  If they marry, they sharply cut their total housing costs.  They cut the total cost of furniture, appliances, fuel, and health insurance.  Even groceries get cheaper: think CostCo.

These savings are especially blatant when your income is low.  Even the official poverty line acknowledges them.  The Poverty Threshold for a household with one adult is $11,139; the Poverty Threshold for a household with two adults is $14,218.  When two individuals at the poverty line maintain separate households, they're effectively spending 2*$11,139-$14,218=$8,060 a year to stay single.

But wait, there's more.  Marriage doesn't just cut expenses.  It raises couples' income.  In the NLSY, married men earn about 40% more than comparable single men; married women earn about 10% less than comparable single women.  From a couples' point of view, that's a big net bonus.  And much of this bonus seems to be causal.

If you're rich, admittedly, you have to consider the marriage tax.  But weighed against all the financial benefits of marriage, it's usually only modest drawback.

Yes, you can capture some these benefits simply by cohabitating.  But hardly all.  And cohabitation is far less stable than marriage.  Long-term joint investments - like buying a house - are a lot more likely to blow up in your face.  And while there may be some male cohabitation premium, it's smaller than the marriage premium.

If being single is so expensive, why are the poor far less likely to get married and stay married?  I'm sure you could come up with a stilted neoclassical explanation.  But this is yet another case where behavioral economics and personality psychology have a better story.  Namely: Some people are extremely impulsive and short-sighted.  If you're one of them, you tend to mess up your life in every way.  You don't invest in your career, and you don't invest in your relationships.  You take advantage of your boss and co-workers, and you take advantage of your romantic partners.  You refuse to swallow your pride - to admit that the best job and the best spouse you can get, though far from ideal, are much better than nothing.  Your behavior feels good at the time.  But in the long-run people see you for what you are, and you end up poor and alone.

David Frum's critique of Charles Murray's Coming Apart begins with an analogy:

To understand what Murray does in Coming Apart, imagine this analogy:

A social scientist visits a Gulf Coast town. He notices that the houses near the water have all been smashed and shattered. The former occupants now live in tents and FEMA trailers. The social scientist writes a report:

The evidence strongly shows that living in houses is better for children and families than living in tents and trailers. The people on the waterfront are irresponsibly subjecting their children to unacceptable conditions.

When he publishes his report, somebody points out: "You know, there was a hurricane here last week." The social scientist shrugs off the criticism with the reply, "I'm writing about housing, not weather."

For Frum, the "hurricane" is stagnant or falling wages for half or more of the population:

Across the developed world, we see the wages of the bottom half (and in some cases more than half) have stagnated, even as gains have accrued to the top 20%, bigger gains to the top 5%, and the biggest gains to the top 1%.

But Frum's story makes little sense.  Divorce, out-of-wedlock births, and low labor force participation are expensive.  If you're worried about being poor, you'll studiously avoid them.  So how could economic distress be their "root cause"?  To rewrite Frum's hurricane analogy:

A social scientist visits a Gulf Coast town. He notices that the houses near the water have all been smashed and shattered. The former occupants now live in tents and FEMA trailers. They're also malnourished because they keep leaving their food on the beach, where the evening tide quickly carries it out to sea.  The social scientist writes a report:

The evidence strongly shows that the hurricane is causing severe malnutrition.  Back when these people had houses they kept their food inside.  The government is turning its back on the indirect effects of natural disaster.

When he publishes his report, somebody points out: "You know, those hungry people could keep their food in their tents at night." The social scientist shrugs off the criticism with the reply, "I'm writing about malnutrition, not food storage."

My point: The hurricane should have made people more careful with their food.  Yes, they experienced a natural disaster.  But instead of prudently adjusting their behavior, they're being bizarrely short-sighted and irresponsible.  And it makes you wonder: If this is how they act after a hurricane, would their behavior would have been even worse if the hurricane had never hit?

Update: David Frum replies, and Tyler weighs in.

Scott Winship writes,

Whether politicians ignore the poor and pander to the middle class or scare the middle class into thinking they are as bad off as the poor, the result is likely to be the same. Most of our policies will continue to be mis-targeted, as analyses by the Pew Economic Mobility Project and CFED have demonstrated. In turn, they will explode the deficit, leaving less money to promote upward mobility among the poor. And those policies that take the form of tax breaks for investing in savings or education will further price the poor out of markets for mobility-promoting assets--whether higher education or homes--by subsidizing investment the non-poor would have made even without tax incentives. Think "mortgage interest deduction".

This strikes me as a stable political equilibrium. If either political party goes too far in taking away benefits from the affluent and giving more to the poor, the other party will take up the plight of the affluent. The affluent are more numerous and are more likely to vote.

Timothy Taylor has more on the politics of tax reform. We could make our tax system more progressive and more efficient at raising revenue. But it is always in the interest of political entrepreneurs to claim that the affluent are threatened as it is, so we cannot take away their precious mortgage interest deduction or make the tax breaks for education expenses and health insurance less regressive.

Regulators are completing a controversial proposal to shore up the $2.7 trillion money-market fund industry, more than three years after the collapse of Lehman Brothers Holdings Inc. sparked a panic that threatened the savings of millions of investors and forced the federal government to intervene.

This is the lead paragraph from a Wall Street Journal article today, "U.S. Sets Money-Market Plan," by Andrew Ackerman and Kirsten Grind. It's about some proposed regulations for money-market funds.

First, note their use of the word "forced." That panic didn't force the federal government to do anything. The feds chose to intervene. But by using the word "forced," the reporters make it sound as if the regulators are trying to avoid ever being "forced" into something again.

Second, the panic arose because, in 2008, the money market funds were trying to hold on to a $1 per share value and it looked as if they might not be able to. So many people, including me, quickly took their founds out at the $1 per share value to avoid a small haircut. But shares in money market funds are not, repeat, are not like checking accounts or savings accounts. The people who own the funds have no legal obligation to give $1 when you redeem. If earnings fall enough, they might be able to afford only 99 cents or 98 cents or 97 cents. This is called "breaking the buck."

Had the feds not intervened by shoring up the money-market funds, some of the money-market funds would probably have had to cut to a number like 98 or 97 cents. That would have stopped most of the panicked withdrawals. And many people would have learned, or been reminded of, the difference between a checking account and a money-market fund.

Instead, the SEC proposes to stick with moral hazard and add the further regulation that government-caused moral hazard often leads to.

In this article (for which the publisher charges a mere $36), he writes,

We can't seriously think that people are narrowly and permanently self-interested, because the costs of enforcing agreements and constantly guarding against fraud or theft would be overwhelming.

This is from a symposium in Critical Review on the motivations of political actors, both ordinary citizens and leaders. A simple view is that people vote their self interest and political leaders act in their own self interest. An alternative simple view is that people vote in the public interest and political leaders act in the public interest.

We might grant the alternative simple view as describing the intentions of most political actors. Still, representative democracy may do a poor job of arriving at good results, because intentions do not necessarily map well to consequences.

Suppose we are looking at Energy Secretary Steven Chu's granting of government-guaranteed loans to energy companies. As Robert Murphy explains, such loans are bad economic policy even if there are no defaults, and even if there was no political favoritism involved.

When political actors are motivated by the public interest to allocate resources, we should not jump for joy. Instead, we should shout in protest.

When re-reading my recent critique of Robin Hanson's "dealism," I realized that the following could come off as rather harsh:

Robin has spent decades proposing unconventional policy deals.  His track record is an abysmal failure.

None of this means, however, that Robin himself is an abysmal failure.  I don't judge a scholar by the deals he manages to push through.  I judge him by his discovery of important truths.  By this standard, Robin is a great success.  His work on betting markets, health economics, and futarchy leaves me in awe.  Even his errors are fruitful.   The fact that policymakers consistently ignore Robin is their abysmal failure, not his.

By Robin's own dealist standard, he's a failure.  So am I.  So is almost every scholar we admire.  Who isn't a failure?  Jonathan Gruber, a leading architect of Romneycare and Obamacare.  I take this as a reductio ad absurdum of dealism.  It's far better to discover important truths that never leave the Ivory Tower than propagate errors that take the world by storm.

But, say the critics, Iran is different. They have all those mad mullahs over there who don't care about life on earth and simply want to destroy -- fill in the blank -- Israel, the United States, or Israel and the United States. Yet there is little evidence that the leaders of Iran are mad. Instead, they are cautiously conservative. Trita Parsi, the president of the National Iranian American Council and adjunct professor of international relations at the Johns Hopkins School of Advanced International Studies, in his book Treacherous Alliance: The Secret Dealings of Israel, Iran, and the U.S., states it as follows: "But whenever Iran's ideological and strategic goals were at odds, Tehran's strategic imperatives prevailed." He notes that the Iranian government has had informal alliances with Israel against the major Arab nations in the Middle East. These alliances existed not only when the shah was Iran's dictator but also for much of the time the mullahs ran Iran. Through the government of Switzerland, Iran's government made an overture to the Bush administration in 2003, in which it asked the Bush administration to meet Iranian officials to discuss ending the sanctions and bringing Iran back into the community of nations in return for Iran's forswearing any attempt to build nuclear weapons. According to Parsi, the Bush administration, at the behest of Vice President Cheney and Secretary of Defense Rumsfeld, rebuffed them. Moreover, the Bush administration verbally attacked Tim Guldimann, the Swiss ambassador to Iran, for being the bearer of good news. Interestingly, Parsi quotes none other than Efraim Halevi, the former head of the Mossad (Israel's version of the CIA) saying of the Iranian government in 2006, "I don't think they are irrational, I think they are very rational."

This is from my recent article, "Is Iran a Threat?" In it, I also get into why I think the sanctions are a bad idea.

Arnold:

What's your best guess, Arnold?  Now you barely sound more sanguine than I do.

Robin grants much of my critique of dealism.  Then he offers a bet:

Imagine that economists were surveyed and had to choose how they'd best like to describe economic policy recommendations, as:

1. Morals - Arguing for the morality of actions,
2. Deals - Helping groups find and make deals, or
3. Showing Off - Academics do hard things in order to be certified by other academics as impressive, so that students, patrons, and readers can gain status by affiliation with them. Economic policy analysis is such a hard thing.

I'd bet that at least 25% would choose option #2, and even more among those whose style leans sci/tech.

With those three options, I'd expect the breakdown to be roughly 15% morals, 80% deals, and 5% showing off.  But that's just because Robin omits two popular response options:

4. Social Welfare - Identifying the policies that are best for society as a whole.

5. Smart Partisanship - Identifying the most efficient way to advance the political goals you identify with.

With these extra options on the table, I'd bet on a breakdown of 5% morals (which sounds medieval to most economists), 20% deals, 5% showing off, 50% social welfare, and 20% smart partisanship.  Do you disagree, Robin?

P.S. Maybe we could get this on the next Kauffman bloggers' survey?

Yesterday, co-blogger Arnold Kling referenced my work on the U.S. post-World War II austerity. I had pointed out that Keynesian wunderkind Paul Samuelson had blown it with his prediction of a postwar slump.

In the comments, wd40 writes:

During WW2, there was forced saving (war bonds) and investment went into the war effort. Hence, the robust economy of 1946 when consumers could draw drawn their savings and consume items that were not not available during the war. Naive regressions did not sufficiently account for this pent up demand.

This has become the standard response and, in fact, you can find it in textbooks, to the extent textbooks talk about this event.

The problem is that the part about the drawdown of savings is wrong. Here's what I wrote in my Mercatus study, "The U.S. Postwar Miracle."

Keynesian economists also explained why their glum postwar predictions hadn't come true by arguing that people drew down their savings to finance their "pent-up demand" for the various goods they could not have during the war: cars, tires, refrigerators, stoves, and so on. In 1943, Paul Samuelson, in the article quoted at the beginning of this paper, laid out the idea that pent-up demand for consumer goods would cushion the blow of demobilization. Cited in almost every textbook on U.S. economic history, this explanation has become the orthodox one. There's a problem with this explanation, though: it doesn't fit the evidence.

There are two parts of this explanation. The first, which is plausible, is that there was pent-up demand due to the heavy rationing that the government imposed during the war. People were ready to buy cars, for example, after having not been able to do so for over three years. But Samuelson pointed out that this would be a short-term cushion at best. Of course, one could argue that the two years from 1945 to 1947 were short term. But then, after this pent-up demand was satisfied, there should have been a major drop in economic activity and a major increase in unemployment in the medium term. That didn't happen. The unemployment rate was 3.8 percent in 1948 and kicked up to only 5.9 percent in 1949.

The second part of the explanation is that people drew down their savings that they had accumulated during the war. But the term "savings" is what economists call a stock, whereas "saving" is a flow. If I draw down my savings this year, not only do I not save anything this year, but I also spend some of my stock of savings. So, if people were
drawing down their savings, they would have a negative rate of saving. They didn't. While the personal saving rate did fall substantially from a wartime peak of 25.5 percent in 1944 to 9.5 percent in 1946 and 4.3 percent in 1947, it remained positive.

Robin Hanson often describes his normative view as "dealism."  Forget talking about "right and wrong."  Lets take people as they are, and help them hammer out mutually beneficial deals.  Robin's latest word on this topic:

My closest colleagues seem to mostly take a morals view, but many of my students like a deals view. I think I see a correlation whereby academics who lean toward a sci/tech style tend to favor a deals view, while those who lean toward a humanities style tend to favor a morals view. Sci/tech styles tend more toward math, precision, and local incremental contributions toward specific things and plans, while humanities styles tend more toward bigger pictures, wider-ranging applications, broader interpretations, and joining larger conversations.

In sum, how you think about economic recommendations may depend on whether your thinking leans near or far. It seems deals are near, while morals are far, and sci/tech folks lean near, while humanities folks lean far. Precise formal analysis is more near, while flexible more-metaphorical discussion is more far. Particular suggestions for particular conflicts of particular groups is more near, while general more accessible discussion about what choices tend to be good or bad is more far.

My claim: Robin's "dealism" is actually an extremely "far" doctrine.  The doctrine is so far, in fact, that Robin keeps missing some basic facts:

Fact #1: Robin has spent decades proposing unconventional policy deals.  His track record is an abysmal failure.  Correct me if I'm wrong, but to the best of my knowledge:

• Zero Hansonian deals have been adopted.
• Zero Hansonian deals have come close to adoption.
• Zero Hansonian deals have been embraced by any normal person.  His proposals appeal almost exclusively to fans of economics, libertarianism, futurism, and science fiction.
  

The reason for Robin's failure is pretty obvious: Most human beings are far too conventional and stubborn to even consider Robin's suggestions.  And instead of trying to overcome this hurdle, Robin habitually raises the hurdle by criticizing conventional attitudes.  (The latest example).  No realtor would do this.

Fact #2: People often have a very good reason to ignore deals: They have better ways to get what they want.  Such as: persuasion, moralizing, trickery, and bullying. 

Fact #3: The effectiveness of deal-making varies widely by person.  Some people aren't very good at making deals, but excel at moralizing.  Consider the Pope.  If he tried bargaining with Catholics to get them to refrain from abortion, they'd be baffled.  But when the Pope tells them that abortion is morally wrong, millions listen.

Fact #4: The effectiveness of deal-making varies widely by situation.  Just one example: Suppose you bump into an angry drunk in a bar.  Yes, you could take out your wallet and try to bargain with him.  But that would probably make him angrier.  You'd better off if you just profusely apologized.

Robin paints dealism as a hard-headed pragmatic doctrine.  But the doctrine is neither hard-headed nor pragmatic.  It ignores basic facts and doesn't work.  The real reason Robin is a dealist, I suspect, is moral.  Dealism reflects Robin's sense of right and wrong.  He thinks that it's morally right to keep your agreements.  He thinks that it's morally wrong to fight someone who offers you a reasonable deal.  And above all else, he thinks that it's morally wrong to be conventional and stubborn. 

An even more serious problem concerns the restructuring of the original Solyndra loan guarantee, a move that placed new, private investors at the front of the line in the event of a default. The result was that the government's (i.e., taxpayers') claims as a creditor were subordinated. Before the restructuring, Assistant Treasury Secretary Mary Miller wrote to Jeffrey D. Zients, deputy OMB director, and warned him that the change might be illegal. She advised the DOE to consult with the Justice Department before continuing with the plan. "To our knowledge that never happened," Miller wrote to the OMB in August 2011.

Making things even worse, a DOE stimulus adviser, Steve Spinner, whose wife's law firm represented Solyndra on the application, repeatedly pushed for the original loan guarantee to be approved. For example, Spinner wrote an email to an OMB staffer in August 28, 2009 (just before the official approval) asking, "How [expletive] hard is this? What is he waiting for? Will we have it by the end of the day?"

This is from the February Econlib Feature Article, "Lessons from Solyndra," by Robert P. Murphy.

Another excerpt:

Despite the efforts to cast Solyndra as a lone bad apple, the Department of Energy has guaranteed other renewable energy projects that later collapsed. However, even if the DOE program had always backed "winners"--meaning that no borrower ever defaulted, and so taxpayers never contributed a dime--it still would have encouraged an inefficient use of resources.

Bryan writes,

when you make signaling cheaper, agents' natural response is to signal more intensely or on another dimension.

My understanding of the signaling model is that it depends crucially on the relative cost of signaling to people with and without the desired trait. You want the cost to be high for someone without the trait and low for someone with the trait.

With that in mind, I do not see how lowering the cost of signaling for people with the trait does anything other than cause people with the trait to choose the low-cost signal. The problem with a low-cost substitute for a diamond is that it lowers the cost of signaling for people without the desired trait (which is a willingness to buy an expensive gift).

If I come up with a low-cost way to earn a badge that signals intelligence, conscientiousness, and conformity, and that badge can only be earned by people with those traits, then my badge should find a market. One challenge is that when few people use the badge, it seems to signal non-conformity. Thus, the early adopters of my cheaper badge do not do as well as they should. But over time, there are two possibilities. One is that the conformity hurdle cannot be overcome, so that the incumbent signaling mechanism remains dominant forever. The other possibility is that eventually a tipping point is reached, and enough people use the new badge so that it no longer signals nonconformity. At that point, the market position of the old badge rapidly deteriorates.

I think that we will arrive at the second equilibrium at some point. However, predicting when it will occur is difficult.

Arnold's post on segregation makes several points on the signaling model of education.  I'm here to rebut them.  Arnold's in blockquotes:

1. Where Bryan sees college as a useful signaling device for those who are cognitively gifted, I see it as a useful segregation device for the Vickies.

As I've said several times, I see college as a useful signaling device not just for intelligence, but for two "Vicky" traits: conscientiousness and conformity.  Which makes me wonder: If college is where the Vickies go, won't college be a strong signal that you're a Vicky?  If so, Arnold's model morphs into mine.

2. The segregation model predicts that as the society gets wealthier, the dollar cost of college will get higher. The signaling model would not necessarily predict that. In fact, it would predict that the market would try to find less expensive signals.

Au contraire.  Not only does the the signaling model predict that a higher payoff for college will increase demand for signals; it predicts that if the price of signaling falls, people need to increase their quantity of signaling to remain separate from the pack.  As I've explained before:

Many economists assume that market forces will somehow figure out a way to make signaling costs disappear.  But as far as I can tell, they never explain why signaling costs would be easier to eliminate than any other costs.  And on reflection, the truth is precisely the reverse: Signaling costs are especially hard to eliminate.  Why?  Because when you make signaling cheaper, agents' natural response is to signal more intensely or on another dimension.

Let me illustrate my claim with a prediction: The typical engagement ring will always cost several weeks' income.  If industry figures out how to cheaply synthesize gold and diamonds, we'll start making engagement rings out of something else - platinum and rubies, or ivory and T-rex teeth.  Why?  Because one major function of engagement rings is to signal commitment with an expensive gift!  To separate the sheep from the goats, the signal has to be expensive enough to convince the goats to give up.

Arnold again:

3. The segregation model predicts the emergence of institutions like Boston University and George Washington University, which require much more money than brains to attend, and yet which have fairly high prestige, considering.

I'm happy to admit that, in addition to their other functions, colleges are social clubs.   I suspect that this social club function is especially important for religious colleges (think Brigham Young) and less-selective private colleges.  But even if students in "clubby" colleges are implausibly apathetic about impressing future employers, belonging to any selective club almost automatically sends a signal.  As long as (a) the average graduate of BU or GWU possesses special traits that employers value; and (b) employers can't costlessly measure these traits, a BU or GWU degree will pay off in the labor market.

4. I think that if either the utilitarian model or the signaling model of higher education were correct, I would be sure to collect on any bet I make with Bryan about the demise of colleges. If college as we know it manages to persist for another two decades, it will be thanks to the segregation model.

Arnold's right about what he calls the "utilitarian model," better known as the human capital model.  But contrary to Arnold, signaling models readily predict the persistence of costly, inefficient customs.  Indeed, it's the persistence of costly, inefficient customs that inspire much of the signaling literature.

Given Arnold's faith in educational innovation, I have to ask: If entrepreneurs can figure out cheaper ways to teach students, why can't they figure out cheaper ways to segregate students?  Suppose Harvard is just a Vicky Club.  On Arnold's account, there's no reason why an upstart Vicky Club couldn't come along and offer Harvard students Harvard-level segregation for a fraction of the cost.  In the signaling model, of course, this wouldn't work: Quitting Harvard to join an "upstart Vicky Club" sends a godawful signal to employers and the world.