Planet Money - Two Indicators: back to school

Episode Date: October 12, 2022

It's fall, so on this episode, we're taking you back to school. First, what sorority rush can teach us about a particular kind of market. Then, how two economists fixed the way macroeconomics was taught in high schools. It's econ, inside and outside the classroom.Subscribe to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoneyLearn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. By now, college campuses across the country have wrapped up another round of Sorority Rush. You may have heard of Sorority Rush because it's made a splash on TikTok for the last couple of years. Rush is when sororities recruit new members, and it's this jam-packed week of parties and other events. Hey y'all, so today's the first round of Sisterhood, and I'm so excited because we get to wear our cute little dresses. Hashtag Rush Talk started with sorority women at the University of Alabama. They were posting behind-the-scenes videos and everything from their daily outfits. My shoes are from TJ Maxx.

To the songs and rituals that take place during the week. songs and rituals that take place during the week. The TikTok post gave a glimpse into this particular aspect of campus culture, and they inspired discussion about social hierarchies and elitism and the role of the Greek system in college life. But you know what didn't get talked about is economics. And that's where we come in, because it turns out Sorority Rush illustrates a concept called matching markets. And matching markets are hugely important to the economy. They help pair hospitals with medical residents and organ donors with transplant recipients. Hello and welcome to Planet Money. I'm Waylon Wong.

And I'm Adrian Ma. Today on the show, we're bringing you two episodes from our daily podcast, The Indicator. First, we head to college to learn what sorority rush reveals about matching markets. And then it's back to high school to hear about how economists tried to fix the way AP macroeconomics was taught. Al Roth is an economics professor at Stanford. He won the 2012 Nobel Prize, along with Lloyd Shapley, for their work in market design, specifically matching markets. That's where two parties need to get paired up. If you go to a cocktail party and someone says, Professor Roth, what do you do for a living?

And you say, well, I pioneered research in the field of matching markets. And someone says, well, what's that? What do you say? Well, that's happened to me more field of matching markets. And someone says, well, what's that? What do you say? Well, that's happened to me more than once. And I normally start by saying what it's not. What matching markets are not are markets where prices are involved. Those are called commodity markets. Commodity markets are markets where you don't care who you're dealing with because commodities are all the same. And so what the market is supposed to do is find the price at which

supply will equal demand. But in lots of markets, we're not dealing with commodities. You care who you're dealing with. There's a relationship involved, and those are matching markets. The labor market is an example of a matching market. So is online dating and the residency matching process for medical students and hospitals. Al got the idea to look into sororities from his undergraduate students who were involved in the Greek system. Sororities were especially intriguing because they had a centralized clearinghouse to make matches. Al wanted to learn how the process worked and whether it produced what economists call stable matches. A match is stable if there aren't what we call blocking pairs. And a blocking pair is a pair of people

not matched to each other who would both prefer to be matched to each other. So a stable match is like the best you can get. It's the best you could get given what's available and what everyone else is getting. Yes. Preferences and rankings are a big part of matching markets. So let's say I'm doing sorority rush. I visit house alpha and House Beta. And I like House Alpha the best. So I rank House Alpha number one and put House Beta at number two. Now, these houses are also ranking me. House Alpha puts a bunch of other students ahead of me on their list.

But House Beta puts me at the top of their ranking. The system will match me with House Beta because it's the house highest on my list that also ranked me highly. This is a stable match. Al and a fellow researcher published a paper on sorority matching markets in 1991, and the process still works in the same way. So let's look at how it plays out in real-life sororities. At the University of Virginia, more than 1,000 women go through Rush every year, hoping for a spot in one of 15 houses. Grace Lee is a senior at UVA who went through Rush a couple years ago and is now on the other side of the process, helping to recruit new members for her sorority.

The week kicks off with a series of parties where every recruit, or Rushie, visits every house. I needed to be mentally prepared to, to like be just on for eight hours, constantly smiling. I'm saying the same things like, hi, my name's Grace. UVA does their rush in the winter instead of in the fall like a lot of other colleges. So for this first round, it's a lot of traipsing between houses in cold weather. So girls would be wearing like jackets and sweatpants and you know, as they get to the the house there's a bin outside. They'll just put all your like clothes you know in there and then you'd jump into the house and you're in there in your nice dresses and when you come out everyone's like looking for their sweatpants again. These parties are short, around half an hour. Each

rushie chats with a few sorority members and then it's on to the next house. And then after all the parties are done, it's time for the first ranking. So at UVA, rushies write down their top 10 houses. The sororities also score each recruit. And all that gets fed into a computer program that looks for pairings. That is where the rushie liked a sorority, and that sorority also gave a high score to the rushie. The women then find out which houses they get to visit for round number two. You don't get your houses back until maybe 30 minutes before like next day starts.

So you've already got your outfit on and you're just like waiting to find out where you're going. Yeah. And that's why it can be pretty tough, I guess, because let's say you really liked a house and then you get your results back and the house like isn't on your list, then it might be a little sad, but then you have to still be like really happy for your other houses. But by the cold logic of the matching market, the system is doing its job. Remember, the objective is stable matches, the best possible pairing for both sides. So this process of sorority visits and ranking, it repeats over several rounds, with women visiting fewer houses each time. Grace says that at UVA, when it's down to just two houses, the sororities are really trying to win over the potential new members, or PNMs for short. By the end, it's the sororities being like, oh, like, choose us.

You know, we really love you and you're going to have such a great time here. And then, yeah, it's up to the PNM to rank which house they like the best. And then on bid day, like they would all like open their bids together and then see which house they got into. And then we would be like in the house waiting for them with a ton of like balloons and streamers everywhere. And once they come in, there's a lot of cheering. It was just so much fun. Now, this sounds like a happy ending for everyone, but Alroth did find cases where Rushies tried to circumvent the matching system. Instead of ranking their top two in order of preference like they were supposed to, they only listed one house in the final round. One of the things that economists talk about when we talk about centralized clearinghouses is whether they're incentive compatible. Okay,

that's a fancy term. And what it means is, do they make it a good idea for you to tell the truth about what your preferences are? Now, when things aren't incentive compatible, people sometimes play strategically. So some recruits try to engineer an outcome instead of expressing their true preferences. Al says this happens in other kinds of matching markets, too. It happened in New York City with parents trying to get their eighth graders into specific public high schools. Yeah, that was a couple of decades ago. And Al and a team of economists actually went in to help the city revamp its admissions matching system. So if you look at medical residency match, organ donation,

high school admissions, these are all pretty high-stakes situations where Al's work on matching markets has played a big role. Sororities don't get as much attention, even though their matching process works in largely the same way. Sometimes people are surprised that economists study things like this, but economists study how scarce resources are allocated and how to make them less scarce. And so this is a case of allocating scarce resources in a two-sided market. Maybe next installment of Rush Talk can be about economics instead of outfits? Yeah, instead of saying, my shoes are from TJ Maxx, they'll be like, my knowledge of

matching markets comes from this 1991 research paper. It's vintage. Hey, good economic research never goes out of style. Up next, we head back to high school. Indicator co-host Darian Woods and I, we tell the story of two Fed economists who fought to update AP Macroeconomics textbooks. Macroeconomics Textbooks. It's that time of year when teachers are dusting off their textbooks and preparing for their classes to return. But some economics teachers are learning that a core part of what they have been teaching has been wrong.

Jane Eyrig is a senior advisor at the U.S. Central Bank, the Federal Reserve. Many students only take one economics class in their lifetime. And so whether it's in high school or whether it's in college, let's teach them what's going on. In particular, there's a problem with the way macroeconomics is taught. And macroeconomics, that's the study of things like unemployment, inflation, interest rates. So Jane's Workplace, the Federal Reserve, it sets interest rates to manage the economy, to try and keep jobs and inflation at just the right level. But to a lot of us, our understanding of the Fed is all mistaken.

One of the biggest things that the Federal Reserve does is set interest rates. The Fed wants to keep inflation under control while also keeping people in jobs. Interest rates are maybe the most important number for the economy. But starting in 2008, the way that the Fed went about raising or lowering interest rates completely changed. Some big changes that are happening at the Fed that aren't really incorporated into the classroom yet. And several years later, it became clear the Fed was committed to this new way of tweaking interest rates. And so Jane tried to get the word out. I worked with two co-authors and wrote a paper for economists on the new tools

because we knew even in the economics profession, it was not well understood, the Fed's new framework. And in her paper, Jane described the old way the Fed used to work, this sort of old-fashioned lesson that you might see in a lot of econ textbooks. And it's that the Fed changes interest rates through these actions called open market operations. So to understand open market operations, first you need to know that the central bank is kind of like a bank for banks. So like Chase or Wells Fargo will have accounts with the Fed and that's where they put their cash. And that cash is called reserves. And retail banks will also lend part of their reserves to each other overnight through this system with the Fed.

Like maybe one bank had a lot of people's checks coming in and it needs to cash them out. So this bank might borrow from another bank for a sliver of interest. And by the way, this is still true. You know, your bank needs to have the funds to pay my bank back. So, you know, there's just a lot of liquidity needs that banks have every day. But in the old way, you have a situation where the Fed decides it wants to, say, raise interest rates. Maybe there's too much inflation. Just an example, right, Adrian?

Right. Just hypothetically speaking. So in this old world, in the old textbooks, the Fed would sell treasury bonds to the banks at a sweet deal. books, the Fed would sell treasury bonds to the banks at a sweet deal. It would be a very cheap price and the bank thinks, I could make some money by buying these treasury bonds from the Fed. And then the banks would have lots of treasury bonds, but they wouldn't have very much cash in their reserves. And so that meant when the banks were lending to each other, they would need a higher interest rate because there's not much cash floating around. Cash is really hard to get. So to recap, the Fed wants to raise interest rates. So it sells treasury bonds so that banks have less cash. That means the banks charge other banks a higher amount of interest for

that remaining cash. And the higher interest rate flows through the rest of the economy, hitting car loans and business loans and everything else, and the economy slows down and inflation goes down. Are you with us? There are a lot of links in this chain, and it's kind of indirect. So you could kind of think of this as like the Fed is paying a plumber to fix the pipes. The plumber, or in this case, the banks, is doing the dirty work. That all changed, however, in 2008, when the economy started crashing in the Great Recession. The Fed was scrambling to stimulate the economy and started buying massive amounts of treasury bonds from the banks. And so it was doing basically the same thing, open market operations, buying or selling bonds from banks to indirectly control the speed of the economy. But this time the scale

was just enormous. Instead of billions, it was hundreds of billions and then trillions of dollars worth of buying. So these banks were just flooded with cash. And that meant that they weren't so interested in the Fed buying or selling small amounts of bonds to them. So like really a rough analogy would be like if your plumber, again, in this case the banks, became a multimillionaire, they're not going to respond to your $300 call out to tighten the water pressure of your shower. And so now the question is, well, how do you raise rates when some people call the amount of reserves in the banking system super abundant or super ample?

So the Fed decided to raise interest rates directly. Now the Fed's main way of controlling interest rates is just to change the rate of interest on the cash that banks hold with the Fed on those reserves balances. Kind of simple. The Fed lowers or raises interest rates more directly with banks rather than playing around with this old indirect way, the open market operations. Basically, instead of hiring a plumber, the Fed is doing the plumbing itself. And so I wrote this article. It was put out in the Journal of Economic Perspectives, but that's really targeted to economists, not the broader community that teaches about

monetary policy. So getting this idea in front of her peers was one thing, but Jane's end goal was really to get this new idea to the sort of young economists in training, right? The people who are taking advanced placement macroeconomics in high school. AP Macro is a university-level course that's taken at high school. It's for the kids that are just hopelessly in love with econ.

And there are a lot more of them than you might think. Well, over 100,000 kids take AP macro each year. And so the outdated curriculum was a big problem. And so Jane needed somebody who she could reach out to in the economics education community. And she found one one day at the Fed with Scott Walla. Scott is an economics education coordinator there. Which is really, you know, kind of my dream job. But just telling teachers the new way wasn't enough. For one thing, the AP exam still required you to know the old open market operations stuff. So teachers still had to teach that old indirect way.

So Scott and Jane called up the college board. The college board runs the AP Macroeconomics curriculum and exam. They were well aware of the problem, very receptive. They realized that this change had occurred and there was a mismatch. But then they told Scott and Jane that this is a pretty major change. It rewrites the entire curriculum in textbooks and exams on how banking and the Fed works. So change is not going to happen overnight. Plus, econ teachers need to be taught this stuff, too. I think that spurred Scott and me to start putting out a lot of material out on the St. Louis website to try to build those resources for the teachers.

Teachers like Mike Kyman. Mike teaches at Timberland High School in Missouri. How did that feel for you as a teacher, you know, knowing that you'd been teaching from textbooks that basically were out of date? I felt exactly like the kids. Just, what are we doing? Mike found a solution, though, by teaching both ways. Here's the answer for the AP exam, and here's how it really works.

But Mike doesn't need to do that anymore. A couple of months ago, Mike and Scott and Jane heard the news that they'd been hoping for for years. The AP macro curriculum was getting updated, starting now. Here's Scott from the Fed. I don't know if there was virtual champagne, but there was definitely, you know, a hooray. But then, you know, of course, the teachers are like, oh my gosh, I have to learn a lot. You know, Scott and Jane, please help me. I did say, Jane, that there's been a shift in the demand curve for this kind of knowledge.

And Mike, the teacher, he's also pretty excited to be teaching the new curriculum if his school colleagues will let him. I have teachers in the building who are like, why do you do this? Why do you inflict this pain on kids? And I go, because it's important. It's how you end up paying however many percentage points on your student loans that you go to college or a mortgage or anything like that. These Indicator episodes were produced by Corey Bridges, Nikki Ouellette, and Catherine Yang, who also checked the facts.

They were engineered by Debbie Daughtry, Maggie Luthar, and Robert Rodriguez. Special thanks to Mary Claire Peet. Viet Le is the Indicator's senior producer, and Caken Cannon edits the show. I'm Adrian Ma. This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.