401(k) plans: a never-ending story

I have worried about this issue before, but it is never bad to keep up with the reminders:

 If you have a 401(k) plan through your employer or an IRA or other investment account through your bank, the financial institution may try to set you up with a "financial adviser" to help steer your investment decision-making. This person will claim to be giving you advice in your own interest but in fact is under no legal or professional obligation to advance your interests. His real job is to steer you into high fee products that are lucrative for his employer. This is not criminal fraud that the FBI will investigate. It's not a civil offense that the SEC will investigate. It's not illegal. The Labor Department tried to change the rule and impose a fiduciary standard at least for employer-sponsored plans but congress stepped in to tell them no. You're never going to have a world without some sociopaths breaking the rules (read Josh Levin's amazing reporting for a spectacular example) but what we have is a world where congress steps in to make sure that deliberately peddling bad advice to middle-class savers isn't against the rules.

The part of this that I find the most painful is that these problems are occurring in parallel with a quest to reduce the level of social security.  People seem to get a reputation for being "tough-talking realists" for saying that entitlement spending (especially retirement funding) is unsustainable.  But there is no essential need for companies to try and hide the costs of these funds and the realistic impact that has on the rate of return.  In fact, doing so would be a positive social good in that people could save at more realistic levels.

On the other hand, 401(k) have a captive audience (you can't change your 401(k) provider without changing your job).  So they have a vested interest in extracting as much value as possible from the investors as the person who decided to contract with them is the employer.  So long as the people invested in the plan don't realize (while they are employees) that the plan gave bad advice, there is little impact to the employer.  So a classic principal agent problem. 

But there is no fiscal reason to do this to retirees.  After all, high profits for private firms should not be a political goal that trumps everything else.  And reputation won't matter as firms can always re-incorporate or change their name. 

So this suggests a different agenda -- not to improve retirement conditions for older adults but to support the finance industry.  Industry support is fine, but it really should be transparent. 

The Shanghai Surprise -- something that people who followed the PISA story closely were already talking about

In the wake of the release of the PISA scores, one of the big topics was Tom Loveless's Brookings research which seemed to show that not only was Shanghai unrepresentative of China but the city's PISA scores weren't actually representative of the city.

Theoretically, at least, the ban against Shanghai’s migrant children attending primary and middle schools (up to age 14) was lifted in 2008.  For high schools (and the potential PISA population), Shanghai adopted a point system allowing some migrant children with highly educated parents or other high status characteristics to attend.  That system went into effect July 1, 2013 so it is too early to gauge the impact of this very modest reform.  And it obviously would have had no effect on Shanghai’s school population for PISA 2012.

The barriers to migrants attending Shanghai’s high schools remain almost insurmountable.   High schools in Shanghai charge fees. Sometimes the fees are legal, but often in China, they are no more than bribes, as the Washington Post has reported.  Students must take the national exam for college (gaokao) in the province that issued their hukou.  An annual mass exodus of adolescents from city to countryside takes place, back to impoverished rural schools.  At least there, migrant kids might have a shot at college admission.  This phenomenon is unheard of anywhere else in the world; it’s as if a sorcerer snaps his fingers, and millions of urban teens suddenly disappear.

The story was widely covered. The Washington Post's Valerie Strauss did an excellent summary. Joshua Keating also had a good write-up at Slate. And not surprisingly, Diane Ravitch has been all over it.

All of these pieces came out before December 17, 2013, which was when the New York Times Editorial Board published this:

Shanghai: Fighting Elitism
China’s educational system was largely destroyed during Mao Zedong’s “cultural revolution,” which devalued intellectual pursuits and demonized academics. Since shortly after Mao’s death in 1976, the country has been rebuilding its education system at lightning speed, led by Shanghai, the nation’s largest and most internationalized city. Shanghai, of course, has powerful tools at its disposal, including the might of the authoritarian state and the nation’s centuries-old reverence for scholarship and education. It has had little difficulty advancing a potent succession of reforms that allowed it to achieve universal enrollment rapidly. The real proof is that its students were first in the world in math, science and literacy on last year’s international exams.

One of its strengths is that the city has mainly moved away from an elitist system in which greater resources and elite instructors were given to favored schools, and toward a more egalitarian, neighborhood attendance system in which students of diverse backgrounds and abilities are educated under the same roof. The city has focused on bringing the once-shunned children of migrant workers into the school system. In the words of the O.E.C.D, Shanghai has embraced the notion that migrant children are also “our children” — meaning that city’s future depends in part on them and that they, too, should be included in the educational process. Shanghai has taken several approaches to repairing the disparity between strong schools and weak ones, as measured by infrastructure and educational quality. Some poor schools were closed, reorganized, or merged with higher-level schools. Money was transferred to poor, rural schools to construct new buildings or update old ones. Teachers were transferred from cities to rural areas and vice versa. Stronger urban schools were paired with rural schools with the aim of improving teaching methods. And under a more recent strategy, strong schools took over the administration of weak ones. The Chinese are betting that the ethos, management style and teaching used in the strong schools will be transferable.

If you're curious, you can click here to see Tom Loveless's head exploding.on Twitter.

Our annual Toys-for-Tots post

[update: A reluctant plug for Toys 'R Us. They still carry metal Tonkas and at least here in LA they're having a sale on musical instruments with guitars and keyboards going for $20.]


A good Christmas can do a lot to take the edge off of a bad year both for children and their parents (and a lot of families are having a bad year). It's the season to pick up a few toys, drop them by the fire station and make some people feel good about themselves during what can be one of the toughest times of the year.

If you're new to the Toys-for-Tots concept, here are the rules I normally use when shopping:

The gifts should be nice enough to sit alone under a tree. The child who gets nothing else should still feel that he or she had a special Christmas. A large stuffed animal, a big metal truck, a large can of Legos with enough pieces to keep up with an active imagination. You can get any of these for around twenty or thirty bucks at Wal-Mart or Costco;*

Shop smart. The better the deals the more toys can go in your cart;

No batteries. (I'm a strong believer in kid power);**

Speaking of kid power, it's impossible to be sedentary while playing with a basketball;

No toys that need lots of accessories;

For games, you're generally better off going with a classic;

No movie or TV show tie-ins. (This one's kind of a personal quirk and I will make some exceptions like Sesame Street);

Look for something durable. These will have to last;

For smaller children, you really can't beat Fisher Price and PlaySkool. Both companies have mastered the art of coming up with cleverly designed toys that children love and that will stand up to generations of energetic and creative play.

*I previously used Target here, but their selection has been dropping over the past few years and it's gotten more difficult to find toys that meet my criteria.

** I'd like to soften this position just bit. It's okay for a toy to use batteries, just not to need them. Fisher Price and PlaySkool have both gotten into the habit of adding lights and sounds to classic toys, but when the batteries die, the toys live on, still powered by the energy of children at play.

Divergent and convergent educational outcomes -- the sour grapes effect

This is another topic that we've kicked around for a while that's recently become more relevant (from a previous post):

As much as I complained about them at the time, the education classes I had to take to get certified did have some highly useful concepts. One of those was the distinction between convergent learning (where you want all students to reach the same final answer) and divergent learning (where you want each student to come up with a unique answer). Before you made a lesson plan or write a test, you were supposed to ask yourself where you want to see convergence and where you want to see divergence.
...
There is an common but fatally naive misconception that convergent learning goes with math and science while divergent learning goes with arts and humanities. Almost all subjects start with a large convergent learning component including the arts (try picking up an instrument and see how much divergence your teacher tolerates in the first few lessons). More importantly, ALL subjects are fundamentally divergent at a high enough level. Writing a novel, composing a symphony, proving a conjecture or designing an aircraft are all creative exercises in constrained problem solving. We demand that certain conditions be met but we expect that each solution (or at least the method behind it) will be unique.

Pretty much by definition, divergent outcomes are problematic when it comes to metrics. This can lead to what we might call the sour grapes effect, convincing ourselves that a certain attribute isn't important because it's difficult to measure or to work with. "Looking where the light is good" is always a questionable strategy, but it becomes particularly worrisome when the results of the analysis are used to assign resources.

We are, of course, talking about huge amounts of money and there has been no real effort to insulate the parts of the reform movement coming up with radical changes in what we teach and how we teach it from the parties who stand to make billions of dollars from these changes. 

One of the "benefits" of highly standardized teaching methods (taken to its logical extreme in the large number of scripted presentations found in Common Core-based lessons) is that they tend to produce more convergent outcomes. Pedagogically, this convergence may actually be a bad thing, and indication that these students have not actually thought through the questions on their own. It does, however, make the outcomes much easier to measure.

Paradigm shift on trade and inequality

Life has been busy so posting is light. But this point by Matt Yglesias cannot be missed:

But of course this isn't something that just happened. A lot of research has come out in recent years indicating that contrary to the blithe assurances of economists expanded trade with China has in fact reduced the earnings of American workers substantially. At the same time, these developments have made America richer overall. Which is to say that the resources exist, in principle, to make investments in Social Security, education, universal health care, wage subsidies, etc. that leave everyone better off. We just haven't actually done those things. And that, at the end of the day, is my bottom line. The broad shape of the economy is always shifting. What matters for big distributional outcomes isn't really those shifts, it's what the political process does with them. Our process has done a little of what we should be doing (Obamacare, for example) but also a fair amount of the reverse—as seen in the relentless drive for Social Security cuts.

This insight is really the heart of the inequality discussion.  People try to frame it as a form of social justice (let people keep what they earn).  But access to markets is, and always has been, regulated by governments.  Even in the state of nature, customs arise to facilitate trade and barter. 

But the failure to redistribute really makes trade policy look stupid.  Why should workers sacrifice earning power so other people can become richer?  Sure, there is an "on average" issue.  But that is only interesting if the wealth is broadly shared.  The relentless attack on taxes and social security seems to break the implicit social contract of "if we are richer then we will all be better off".

Now add in this new stuff on Canadian exceptionalism  (more Canadians work more than Americans and the gap widened when the US cut tax rates) and it all looks like a "bill of goods".  After all, taxes might well be the mechanism by which the gains from improved trade wealth are shared.  And yes, there may be some deadweight loss, but one presumes that the increase in trade wealth is large or they wouldn't be worth capturing.

[EDIT: Frances Woolley has some smart things to say about Noah Smith's argument.  But we don't need the strong form he proposes to spot a problem.  The tax effect has to be massive to overcome the wealth distribution argument.  Some of the arguments, like the different marginal tax rate on the second earner, suggest tax policy reform and not necessarily lower taxes]

It's killing me that I am too busy to properly develop these points but they are really, really important. 

Treatments and payback curves

[Epidemiology examples used by marketing statistician -- proceed with caution.]

In one sense, education research is like much of the research done by epidemiologists: the outcomes researchers are most interested in are complex and take years, even decades to fully express themselves. In both cases, we are generally forced to rely on relatively simple, short-term indirect metrics.

Treatments (at least treatments with significant effects) are likely to have some effect on the relationship between the outcome and the indirect metrics. For certain questions, you're OK as long as the relationship maintains the same direction; for other questions, though, these changes have a way of unexpectedly causing serious problems.

One of the issues that comes up at this point is how short-term your metric can be. You might be able to get a read on the cardiovascular impact of a blood pressure drug in a couple of weeks.  The analogous impact of a diet and exercise program might take a year to show up. Health researchers are well aware of these concerns; education researchers, particularly those influential with the reform movement, tend to be more nonchalant about the robustness of short-term indirect metrics. Given the trend toward deferring pedagogical and policy decisions to these metrics, that's a big concern.

I pointed out a case earlier where learning a different approach to multiplication put a student at a disadvantage in elementary school but had a significant pay-off in more advanced grades. On the other end of the spectrum, there are methods of covering material that improve test scores for a short period but which don't necessarily lead to retention.

Ideally, the benefits of an education are spread out over decades. It may not be practical to measure those benefits directly, but we can keep in mind the limitations of our proxies. This point will be coming up again in this thread.

PISA and the original Sputnik moment

Found both at the Wall Street Journal and the Fordham Institute website:

A Sputnik moment for U.S. education

Chester E. Finn, Jr.

December 08, 2010

Fifty-three years after Sputnik caused an earthquake in American education by giving us reason to believe that the Soviet Union had surpassed us, China has delivered another shock. On math, reading, and science tests given to 15-year-olds in sixty-five countries last year, Shanghai’s teenagers topped every other jurisdiction in all three subjects—by a sweeping margin. What’s more, Hong Kong ranked in the top four on all three assessments.

I see lots of movement reformers (including the president) making a connection between the way we're reacting to our PISA scores and the way we reacted to Sputnik. This is odd, not because the comparison isn't apt, but because this seems to be a case of alluding to the joke and forgetting the punchline.

The most notable thing about the reaction to the original Sputnik Moment was how completely misguided it was. The Soviets weren't surging ahead of us in aerospace, let alone in science in general. American education wasn't failing to produce first-rate scientists and engineers; if anything, we were seeing a tremendous run of talent and innovation. The most notable pedagogical response (new math) not only didn't dramatically improve math and science education; it was widely seen as a failure and was largely abandoned a few years later.

Sputnik did help to increase the amount of money we were spending on space exploration (and gave then-Senator Johnson a wonderful propaganda tool for his pet cause). It also freed up generous funding for other research initiatives like DARPA. All that cash certainly had a strong positive (though generally indirect) impact on science education, but in terms of education reform, the Sputnik crisis was basically a misconception leading to a fiasco.

With that in mind, when people talk about this being "our Sputnik Moment," my biggest fear is that they might be right.

A very nonstandard pedagogical example

Not sure about how this post over at You Do the Math came out, but it does fit in closely with the Common Core/math curriculum thread that will be spooling out here at West Coast Stat Views over the next few weeks. The post talks about my, in retrospect, rather odd refusal to learn my multiplication tables in elementary school and it illustrates some of the points that will come front and center when George Polya comes into the discussion.

Weekend blogging -- all auteur, all the time

As mentioned before, I have mixed feelings about auteurism as a theory, but I generally enjoy the corpus.

Hulu's "Criterion Picks" theme this week is "Starring the Director" and they've made some interesting films available for free viewing. They include a hard-to-find picture by Orson Welles (which I haven't seen) and The Rules of the Game by Jean Renoir (which I have seen and which lives up to the hype).

As Joe Bob used to say, check it out.

Passions and Procrustes

Many of the problems with education reform come from starting with overly simplified models and assumptions, then compensating with overly complicated implementations schemes. This is true with the areas we talk about a lot -- teacher and school quality, incentives, accountability -- but it's probably even more true with pedagogical questions.

Though virtually every proposed educational innovation comes with language about treating students like individuals and recognizing different learning styles (until the phrases start to sound like the conditioned aphorisms of Brave, New World), it is simply the nature of general, top-down reforms to tend toward the Procrustean. Most start with good intentions, but the pressure to come up with something easily implemented and widely applicable (not to mention, pitchable), invariably undercuts those intentions and generally produces an overly simplistic, one-size-fits-all solution.

All of this tends to lead to those weird disconnects you often see in education reform debates where a group of people approvingly discuss proposals that are completely at odds with their owns experiences as students. This is never more true than when you look into the origins of the passions that drive the best work.

Good teachers try to cultivate and where possible leverage and concatenate enthusiasms. They understand that...

R.L. Stine can lead to Stephen King.

Stephen King can lead to H.P. Lovecraft.

Lovecraft can lead to Arthur Machen

Machen can lead to Ovid and Grimm and any number of wonderful  books on myth and folklore.

And, of course, myth and folklore can lead to pretty much any area of art or culture.

The trouble is, you really don't want to put R.L Stine in your standards. It's not an approach that would work for everybody and besides, he's not that good.

You do, however, want all of the students to have an RL Stine of their own. It could be JK Rowling (who is good). It could be comic books that lead to folklore through stories about Thor and Hercules. A collection of Star Trek books that lead to a career in physics or engineering (which has happened surprisingly often). A fascination with sports that leads to a career in statistics.

When you ask successful people how they got interested in their fields, most will tell stories that are variations on this theme. Paul Krugman, for example, first became intrigued with the underlying principles of economics when he read Isaac Asimov's Foundation trilogy.

The trouble is that this is what they call in ed schools divergent learning, every student is expected to a different outcome. Worse yet, it's doubly divergent. Not only are students reaching different destinations; they're getting there via different paths. Movement reformers favor standardization, test-driven metrics and top-down initiatives, and despite endless protests to the contrary, it is horribly difficult to foster the kind of learning I've just described using these approaches.

And national experiments

I strongly believe in being careful when generalizing the results from one country to another, particularly when those countries are as different as the US and Sweden. On the other hand, when considering radical shifts in national policy, you have to at least consider how well those policies have worked in other countries.

Somewhat surprisingly, Sweden is perhaps the best test we've had of the kind of privatization advocated by many in the education reform movement. As a result, the country's reforms were embraced by such unlikely supporters as the Heritage Foundation.

Here's a 2010 Foundation interview with Thomas Idergard, Program Director of Welfare and Reform Strategy Studies at Timbro, a "free-market think tank" based in Stockholm:

The Swedish school voucher program was introduced in 1992 by the then Center-Right government. First, the Social Democrats opposed the reform, but after having returned to power in 1994 they not only accepted it but also expanded the legislated compensation level of the voucher. Today there is almost a total national political consensus—with the one and only exception from the small Left (i.e., former Communist) Party—on the foundations of school choice in Sweden.

Since the 1970s, the Swedish school system had declined regarding quality and student attainment. One reason for this was the lack of choice. Only the very rich, who could afford private schools with private tuition fees on top of our very high taxes, had a right to choose. For all the rest, the school was one monolithic organization in which all students were considered to have the same needs and to learn the same way. The lack of choice created a lack of innovation regarding pedagogical concept and ways of learning adapted to different students’ needs. Public schools, run by politicians in the local branch of government (cities and municipalities), were all there was for 99 percent of all students.

The school voucher program was designed to create a market—with competition, entrepreneurship, and innovation—based on the Swedish and Scandinavian tradition of social justice and equality: All families should be able to choose between public and private schools regardless of their economic status or wealth. This equal opportunity philosophy, taken into its full potential, created an education market!

Since the calls for American reform are often based on low PISA scores and since a new round of scores have just been announced, it would be reasonable to check what has happened to Sweden's scores:

No other country has fallen so abruptly as Sweden in maths over a ten-year span. Overall, not one of the other 32 countries included in the OECD's Programme for International Student Assessment (Pisa) survey has seen its students take such a beating in their studies.

"The bleak picture has become bleaker with the Pisa review that was presented today," Anna Ekström, head of Sweden's National Education Agency (Skolverket), said after she became privy to the results. She had hoped for Sweden to finally buck the trend and stop declining in the ranking.

Sweden's schools now rank below both the United States and the UK according to the Pisa rankings.

I've never been a fan of using international test scores (even less so after this history lesson from Diane Ravitch), but if you are going to use such arguments they need to be what my business analyst friends call "directionally accurate." Recently we've seen a lot of arguments that don't clear that bar.

Natural Experiments

This was fascinating:

Their answer is yes: when urban life revived in the medieval period, French towns tended to be near old Roman centers, while British towns didn’t. And the British had the better of this deal, because optimal town locations in the Roman era — with good roads — weren’t the same as in the Middle Ages, when roads remained terrible but the technology of water transport had improved.

 Which says all sorts of things about how it might actually be possible to improve things in a rather dramatic way by asking some tough questions. 

How did we miss this?

It's terrifying when Brad DeLong is more on top of interesting stories on education than we are!  But this is from James Kwak: 

I have no problem with the premise: better teachers improve student outcomes, which is worth a lot of money. But do you see what’s going on? To get better teachers, the authors say, requires ”attracting more qualified people” and then “identifying and retaining” the most effective ones.

That just doesn’t follow. And anyone who’s worked in an actual company should realize that. Yes, it’s always better to have better workers. One way to get better workers is to hire more effective people and to fire less effective people. But the other way—which, in most industries, is by far more important—is to make your current workforce more effective. You do that in part by figuring out what attributes or processes make people more effective, and in part by training people and implementing processes in ways that improve productivity.

The idea that the only way to improve teacher effectiveness (remember, they said “requires”) is to increase quality at the front end and link retention to quality on the back end is the kind of illogical, impractical inference you draw if you have a certain type of attitude toward workers: the attitude that there’s only one abstract attribute that matters (quality) and that it’s intrinsic and unchanging. What’s surprising is that this is a non-obvious kind of fallacy: again, anyone who has run a business realizes that what matters more is what you do with the workforce you have.

I think that the whole idea of organizations like Teach for America falls into the trap above.  Focusing entirely on the recruitment and retention piece and not at all on the teacher development piece.  In some ways this seems to be a malaise of our age -- the want to have plug and play human resources instead of developing the work force with patience and practice. 

The conclusion is interesting as well:

But I also suspect that there’s a feeling, maybe not among these authors, but among the billionaires who like investing in education, of “if only more people like us became teachers”—that there are highly productive people and less productive people, and all we need is to adjust the incentives so more of the former go into teaching. I don’t think the world is that simple.

 That would also be a big issue with the whole inter-state competition piece.  If you think ability is an intrinsic quality (and a scalar) that is invariant between positions then this type of approach is very sensible.  Alternatively, if you want job insecurity to be high, using fear to motivate employees is actually surprisingly effective.

That would put reform into an awkward place, wouldn't it?

TFA Context -- one interesting table

On the heels of Gary Rubinstein's recent post on his first year in Teach for America (reviewed here) and this piece by Jennifer Berkshire on the generous contributions the organization gets from numerous corporate donors like FedEx and Subaru, and given TFA's way of popping up in various ed reform discussions, this seems like a good time to review some basic and uncontroversial facts about this very controversial subject.

Let's start with Wikipedia's introduction:

Teach For America (TFA) is an American non-profit organization whose mission is to "eliminate educational inequity by enlisting high-achieving recent college graduates and professionals to teach" for at least two years in low-income communities throughout the United States.

Of course, TFA does other things, but this is very much the persona-mission of the organization, so it's useful to evaluate the performance of TFA as a teacher recruiting organization. There is a great deal of disagreement over how to interpret the data on TFA members' effectiveness and retention, but some other aspects are much more clear-cut.

TFA is a small, expensive program.

More precisely, this was a very small and expensive program; it's become a merely small but very expensive one.

Year	# of Applicants	# of Incoming Corps Members	# of Regions	Operating Budget
2003	15,708	1,646	20	$29.8M
2004	13,378	1,626	22	$34.0M
2005	17,348	2,181	22	$38.4M
2006	18,968	2,464	25	$55.6M
2007	18,172	2,895	26	$77.9M
2008	24,718	3,614	29	$122.3M
2009	35,178	4,065	35	$153.4M
2010	46,359	4,493	40	$176.0M
2011	47,911	5,066	43	$229M
2012	48,442	5,800[21]	46	$244M
2013	57,000	6,000[22]	48

The cost per recruit has increased dramatically

In order for the TFA model to be scalable, the cost per recruit needs to drop sharply at some point. No sign of that yet.

There is reason to be concerned about selection effects

Actually, double selection effects. First there's self-selection. TFA is known for a daunting and highly selective application process that tends to attract high-achievers with solid resumes. Second, there's the process itself:

In 2010, 46,366 candidates applied and 5,827 were initially admitted, making the acceptance rate 12.6%. However, that number does not include those who earned eventual acceptance into the program from the waitlist of 932 candidates. If all on the waitlist were given acceptance, the acceptance rate would be 14.6%. Since some but not all were accepted from the waitlist, the exact 2010 acceptance rate is unknown, but it ranges from 12.6-14.6%. The acceptance rate for 2011 corps members was less than 11%

The result of all this is a tremendously unrepresentative sample of the pool of potential teachers. As a result, it's difficult to apply anything we learn from TFA data to general policy questions in education.

Equal enforcement of contracts?

Dean Baker is strident:

If the connection with AIG isn't immediately apparent, then you have to look a bit deeper. Folks may recall that AIG paid out $170m in bonuses to its employees in March 2009 with its top executives receiving bonuses in the hundreds of thousands of dollars.

These were people who not only shared responsibility for driving the company into bankruptcy; they also had been at the center of the financial web that propelled the housing bubble into ever more dangerous territory. In other words, the bonus beneficiaries were among the leading villains in the economic disaster that is still inflicting pain across the country.

The prospect of executives of a bailed out company drawing huge bonuses at a time when the economy was shedding 600,000 jobs a month provoked outrage across the country. President Obama spoke on the issue and said that unfortunately no one in his administration was smart enough to find a way that could keep the bonuses from being paid. The problem according to Larry Summers, then the head of President Obama's National Economic Council, was that the bonuses were contractual obligations and they had to be honored.

This provides a striking contrast to what might happen to current and former city employees in Chicago and may happen to current and former employers of the state of Illinois and Detroit. In these cases, it seems that the contracts workers had with their employers may not be honored. Employees who worked decades for these governments, with part of their pay taking the form of pensions in retirement, are now being told that these governments will not follow through on their end of the contract.

The differing treatment of contracts in these situations is striking for several reasons. First, the AIG executives stood to gain much more money with their bonuses on a per person basis. In contrast to the six-figure bonuses going to top executives, pensions for Detroit's workers average just $18,500 a year. Pensions for Chicago's workers average over $33,000 a year, but almost none of these workers will get Social Security, so this will be their whole retirement income.

I am not as upset at the difference in size of the individual compensation, the difference in liability for global economic problems, or the asymmetry in harm -- these points are decent but they are secondary to the key argument.  The real issue is whether the need to honor contracts is being applied equally.  And, it is true that bailing out pensioners has a serious element of moral hazard.  But it would be intriguing to see the argument for bank bailouts NOT having at least some element of moral hazard.   

The real question is what is the status of contracts as being fundamental; the ability to amend a long term agreement when the terms work out in somebody else's favor would really change the dynamics of our ability to run a modern economy.  Remember, it is a small walk from this to deciding not to pay for materials that have been purchased because your business plan did not work . . .