Tuesday, May 18, 2010

Internships: Financing Human Capital?

My recent post on private/public education generated a fair amount of controversy (rightfully so, as my views definitely are not set on this issue). I'm currently reading Capitalism and Freedom - something light to kick off my summer - and enjoying Friedman's discussion of education. One complaint he levies is that investment in human capital is too low (as of 1962) relative to investment in physical capital. He cites the difficulty of securing a loan as one major reason. Suppose you make a loan to your neighbor for a tractor. If he quits paying, you can take the tractor. But if you make a loan for him to go to college and he quits paying, you cannot take him and enslave him. Nor can you even expect him to work for you, because he may simply not cooperate with whatever tasks you want done.

Friedman's solution, or one possible one, is investment by companies in their future employees. He suggests in a footnote that "training financed by XYZ insurance company could be made into an assurance of quality (like "Approved by Good Housekeeping")". Is the current system of internships a step in this direction? Most college students, at least around greater DC, are strongly advised to get as many internships as possible. I would believe that an internship with a powerful company, such as the Department of State, could function as a quality assurance for a person with an education but little/no work experience. Perhaps this also explains why so many internships are unpaid; the best internships provide non-monetary compensation by opening up future earnings possibilities.

Of course, I'm not convinced this is a good system. Many internships end up involving a lot of filing and fetching of coffee (I attest to this from personal experience). It's also becoming more common for interns to be hired to do work that would otherwise require paying an employee, and to me this is unfair to the intern. How can the internship system be revised to avoid some of these effects?

Sunday, May 9, 2010

Starve the Beast: Let's Take a Look at the Data

Mark Thoma links to a very interesting article from Bruce Bartlett. The conclusion: "Starve the Beast" actually does very little to reduce government spending. My favorite quote:
On Aug. 7, 1978, economist Milton Friedman added his powerful voice to the discussion. Writing in Newsweek magazine, he said, "the only effective way to restrain government spending is by limiting government's explicit tax revenue--just as a limited income is the only effective restraint on any individual's or family's spending."

It's pretty obvious where Friedman's metaphor breaks down: a family has no source of spending other than its income. It can get a loan for a house, for example, but if a family isn't credibly repaying its loans it will not be able to get any further loans. Government can fail to repay a whole bunch of loans and continue to get more. This needs to get more attention... it's going to be very relevant for domestic American politics for the next few decades as we try to get our fiscal house in order.

Compared with the totality of knowledge which is continually utilized in the evolution of a dynamic civilization, the difference between the knowledge that the wisest and that which the most ignorant individual can deliberately employ is comparatively insignificant. ~Fredrich Hayek in The Constitution of Liberty