"Natural Rate"

Users of Twitter know the thrill of seeing a tweet so good that you want to have it embroidered on pillows.  The form lends itself to aphorisms or clever asides; Oscar Wilde and Dorothy Parker would have loved it. This week, the economist Stephanie Kelton posted a tweet for the ages:  “What is the natural rate of college enrollment?”

It’s slyly great. It’s a play on the “natural rate of unemployment,” a discredited concept popular in the 90’’s. The NAIRU was supposed to represent the unemployment rate an economy couldn’t go below without triggering runaway inflation.  (It was based, in turn, on the “Phillips curve.”) The assumption underlying the NAIRU was that unemployment and inflation were inversely related, so if unemployment got too low, inflation would result.  

It’s an elegant theory that keeps not working.  But it was used for decades to argue against allowing too many people to find jobs.  That is, it functioned to enforce a certain level of poverty and material deprivation as a matter of policy, in order to prevent the devaluation of existing debt through inflation.  Proclaiming it “natural” was a way to paint substantive policy preferences as somehow objective or inevitable. Messing with nature is a dangerous game, after all.  

Kelton knows that. She’s a proponent of Modern Monetary Theory, which, as I understand it, rejects both the Phillips curve and the NAIRU entirely.  MMT holds that some of the ground rules that we take for granted in making public policy are based on a misunderstanding. For example, the idea that public debt “crowds out” private borrowing by forcing up interest rates makes for an elegant theory, and has been used for decades to foretell grave consequences arising from the national debt or deficit.  But according to MMT, the connection between government borrowing and interest rates doesn’t work like that, if it exists at all. That’s because governments that control their own currency, as the US does, can simply print more money. The constraint on government spending isn’t taxation, interest rates, debt, or the NAIRU; it’s inflation. As long as inflation is at acceptable levels, deficits don’t matter.

In other words, MMT fits the empirical reality of the US over the last forty years.  It’s a theoretically grounded explanation of Dick Cheney’s offhand comment that “Reagan taught us that deficits don’t matter.”  In his way, Cheney was correct. Kelton takes his insight in a different direction; she’s a policy advisor to Sen. Bernie Sanders.  But underlying her politics is a sense that we don’t need to enforce austerity on the backs of the poor. We don’t need to sacrifice their livelihoods to a false God.  Put differently, the usual centrist objection to single-payer health care or free community college -- “how are you going to pay for that?” -- is wrongheaded. We should ask, instead, the human cost of not paying for it.  What talent are we leaving on the table? What’s the opportunity cost of forcing bright but lower-income young people into minimum wage jobs, rather than college?

By shifting the model to higher education, Kelton is implying (or I’m inferring; I don’t know her personally and haven’t asked her if this is correct) that the ways in which we have created shortages of higher education are based on a false assumption.  We assume that we can only afford so much of it, so we’ve been shifting the costs to students in order to price out enough of them. That would explain why the lowest-cost colleges get the least public funding. We create an artificial scarcity out of fear that too much education would be, I don’t know, decadent.  (There’s a strong whiff of the old Protestant Ethic in much of the “deficit hawk” rhetoric; prosperity attained through deficit spending is seen as somehow unclean. Some of them literally use the rhetoric of “cleansing” to refer to recessions, as if poor people make money dirty by coming in contact with it.) As with the reserve army of the unemployed, the reserve army of the uneducated helps ensure the payoff of the expensive degrees that only some folks could afford in the first place.  It protects their investment.

That analysis is consistent with Tressie McMillan Cottom’s notion of college degrees as “negative social insurance.”  As she outlined it in Lower Ed, what policy types often call the “college wage premium” is more accurately read as the fine for not going to college.  Students often attend college not because they want to, but because they feel like they have to; the economic abyss that awaits them otherwise is too terrifying.  The paradox, as with insurance generally, is that it works best if most people don’t use it. If “too many” people get degrees, this argument goes, their ‘signaling’ value would decline.  The currency of credentials would be, to use another moral-ish term, debased. But in an economy with single-payer health care, free college, generous wage supports, and the like, that abyss wouldn’t loom so large.  College could once again become optional, but would be allocated along lines of inclination and talent, rather than parental wealth.

If the “natural rate” of college attendance is fictional -- the result of human choices that could have been made differently, rather than some sort of law of nature -- then the austerity we’ve forced onto higher education is, at best, a calamitous waste of talent.  We’re sacrificing potential scholars to a false God, under the mistaken assumption that the wrath of the false God will be terrible if we don’t.

What if we didn’t?

Kudos to Professor Kelton for connecting the dots in such an elegant way.  As a longtime denizen of Twitter, I tip my cap. Well done.