Two big questions for economists today

After spending a weekend with 11,000 economists at the American Economics Association 2015 meeting, here’s my perception of the Big Picture…

The two most important questions on which economists disagree are the following:

  • Can higher education make a person more productive at his or her ultimate job?
  • How much of a society’s resources should be put into reducing CO2 emissions?

Why is the economic value of higher education so important to establish? An assumption driving much of the debate regarding inequality is that a worker with a college degree is more productive and therefore will, in a properly functioning market economy, receive a higher wage than a worker without a college degree. Those who propose radical action to address inequality note that an increasing prevalence of college degree holders has not resulted in an increase in inequality. From this they infer that capital is stealing from labor, specifically by not paying workers for the increase in their marginal productivity as predicted by Econ 101. A possibility that the Big Thinkers don’t seem to consider is “Maybe colleges aren’t teaching anything of value to employers?”

This blind spot is curious because there is a fair amount of evidence that many American college graduates learned little during their four-year sojourn. The book Academically Adrift, for example, cites data from a Collegiate Learning Assessment test showing that many students don’t improve much from freshman to senior year. Studies on students who were admitted to elite schools, such as Harvard, but elected not to attend have found that there was little difference in lifetime income attributable to actually attending the elite schools (though being qualified for admission had a lot of value). There were some interesting additions to this literature at the conference.

Despite the evidence that people who weren’t academically inclined prior to college get little benefit from college and simultaneously suffer four years of lost income, Big Thinker-driven public policy has resulted in a trough being filled with federal tax dollars and a large group of non-selective colleges feeding from that trough. For-profit online schools, such as University of Phoenix, have been particularly aggressive feeders, with roughly 75 percent of their revenue coming from this federal source. “An Experimental Study of the Value of Postsecondary Credentials in the Labor Market” (Deming et al) sent out 10,492 fake resumes to employers on an “online job board” (presumably and found that, for jobs that did not explicitly require a college degree, there was little increase in the chance of being contacted by virtue of having a college degree. In other words, the public and private investment in college might well be worthless for these entry-level positions. For jobs that did require a degree, an online degree was about 22 percent less attractive to employers than a “non-selective” bricks and mortar school, e.g., Cal State. For jobs that required a license that itself entails an exam, such as practical nurse or pharmacy technician, employers didn’t seem to care about anything other than whether or not the applicant was licensed. (This suggests that if colleges stopped grading their own students, as proposed in my “Universities and Economic Growth” article, and every college graduate took a comprehensive exam, employers might see a lot of value in those graduates who had scored well on a neutrally graded exam.) An author of the paper summarized by noting that the lowest level of employer interest was in resumes of graduates of the most rapidly growing and most expensive sector of higher education.

Academic attitudes toward business were on display in this session. Karl Marx had sympathy for the employer, constantly at risk from competition and incorrect estimates of demand. Today’s economists have mostly rejected Marx and apparently have abandoned this sympathy. Nobody raised any questions about whether it was ethical to waste employers’ time with 10,000+ fake resumes. When the authors presented their conclusion that there was no difference in employer interest correlated with sex or race, the audience was flummoxed. As racism and sexism were assumed to be high priorities for America’s employers, how to account for this result? Nobody was willing to ask “Could it be that these employers just want to make money and don’t care whether they make money with black male workers, white female workers, or any combination?”

Justine Hastings, of Brown University, presented “Earnings, Incentives and Student Loan Design: The Case of Chile.” It seems that Chile did what the U.S. did, i.e., offered a lot of student loans for higher education. Their program was more intelligently designed, however, in that they didn’t allow universities to raise tuition in response to this new source of funds. Schools ended up with more students, but not more money per student as has been prevalent in the U.S. Nonetheless, the default rate has been high, especially for graduates of non-selective schools and especially for those who majored in humanities and arts. Unlike Americans, Chileans don’t like to keep flushing cash down the toilet, so now they are experimenting with adjusting the maximum loan amount according to the expected return to getting a particular degree (in Chile you don’t apply to “University of Santiago” you apply for a specific major). It turns out that when students see that the government won’t lend them the maximum for a particular degree program they get the message and try to switch into a degree that will result in higher post-graduate earnings. This is especially true for “low SES” students. SES? Due to the rejection of Marx, mainstream economists apparently can’t talk about class so they refer to “Socioeconomic status“. Hastings has a separate paper “The Labor Market Returns to Colleges and Majors: Evidence from Chile” with the discouraging result that attending a lower quality college and majoring in poetry will not set the country’s employers on fire and, in fact, many people would have higher lifetime earnings if they refrained from attending college.

Amanda Pallais of Harvard presented “Leveling Up: Early Results from a Randomized Evaluation of Post-Secondary Aid”, a paper on the Susan Thompson Buffett Foundation scholarship for lower income Nebraskans who have a high-school GPA of at least 2.5 and maintain a college GPA of at least 2.0. It turns out that people who are going to attend college and graduate will do so even without this grant and people who were marginally attached to academic will become only slightly more attached. The cost of keeping one student in college for an additional semester is $40,000 of foundation funds.

Gregory Clark, in my opinion the best of the Big Thinker economists out there, pointed out that when looking at the cost and benefit of programs to get more people into college, the correct approach is to focus on that last person who, without the program, would not have attended college but with the program will. If the objective of the program is to spur economic growth or reduce inequality, the question must be “How much more attractive will that person on the margin be to employers once graduated? (And how likely is that person on the margin to graduate.)”

Economists generally seem to divide into two camps on the question of mass higher education. Some economists believe that good college students are born, not made. If you weren’t born with a talent for math and studying college can’t help you. Others believe that you can send almost anyone to college and they’ll come out with more “human capital” that employers will pay for. My personal view is that traditional American K-12 and college are reasonable matches for some people, e.g., those who love to sit still and do what a teacher tells them to do. The remainder, however, should not be regarded as discards. They could probably learn the same material if it were presented in a different way. (This view is partly informed by research finding that lectures are extremely ineffective for student learning and they are the cornerstone of K-12 and universities, partly by my experience teaching lab courses and seeing how quickly all kinds of people can learn to program, and partly by experience as a flight instructor where I have had no difficulty teaching qualitative physics to people from all walks of life.)

To sum up, the question of education is critical to the question of whether we should consider the kinds of drastic changes to tax policy that are proposed by Piketty and followers. If K-12 and college are making ever-better American workers then capitalists are using their class power to steal from the working class (potential exception: globalization has made a lot more workers available, thus reducing the market-clearing wage). If on the other hand we are to believe the test scores, the problem is simply that engineers keep designing better machines (capital) while our education system turns out workers no better than those of 30 years ago (but at a vastly higher cost in dollars and time).

Turning our attention to the question of climate change… Energy expenditures are about 8 percent of U.S. GDP. (Compare to 8.4 percent for finance (WSJ), which means that we pay as much to banks than to run our cars, heat and cool our houses, smelt aluminum, and spin our hard drives!) If we do something big in energy it will mean cutting back in other areas, e.g., shoveling out money to universities.

The talk that I was most drawn to was by Juliet Schor, a Boston-based economist who has addressed the question of “Why do Americans work so many hours?” in popular books, starting with The Overworked American: The Unexpected Decline of Leisure (1993). She noted that the 1990 standard of living was roughly double that of 1950. Why wouldn’t Americans all work half-time instead of enslaving themselves to buy more stuff? ( hadn’t even launched at the time!) Schor’s work starts from the presumptions that there are declining marginal happiness returns to earning more while extra leisure time makes people happier. She also implicitly relies on my theory that buying expensive organic locally produced food accelerates environmental damage (due to higher spending). Now that the planet is melting, says Schor, what better time to consider a coordinated reduction in hours so that our economy stops growing and therefore our contribution to global warming is reduced. We’ll all be happier. [sidenote: From Schor’s talk, I learned that Maslow’s hierarchy of needs, a required subject for FAA certificated flight instructors, has been discredited by academics.] Schor proposed a $1.2 trillion annual carbon tax on American industry to be distributed per capita to the American people. This would, she noted, have a salutatory effect on income inequality as well.

For each paper there was supposed to be a “discussant” that provided a critique. Schor, however, got a cheerleader in the form of Frank Ackerman, who teaches in the MIT Department of Urban Studies. He said that it is obvious that we need an immediate massive carbon tax and said that there is a 6:1 ratio in per capita carbon emissions among U.S. states (California: good; Texas: bad; this government chart shows that, excluding a couple of barely populated outliers, states actually fall into a pretty narrow range and nearly all of the variation is due to industry, not consumers). Germany overall emits only half the carbon per capita that we do, according to Ackerman. Why haven’t Americans taken drastic action? Ackerman says that it is because a majority of Americans are (1) stupid (anti-science/Tea Party), (2) racist (oppose CO2 action because action is supposed by Barack Obama, whom they identify as black), (3) stupid (because they see an opinion advertisement from Exxon and don’t recognize the likely bias).

I asked “Do these people you posit all have to be stupid and racist? Isn’t it possible that Americans are simply selfish and like their SUVs, McMansions, etc.? Or that they recognize that this is going to be a big government project and they are skeptical because a lot of other government efforts over the last 50 years didn’t work out as planned/hoped? Or that they are skeptical of science because they remember being told that margarine was the key to heart health while now it is considered poison? Or that they simply prefer to put more effort into this problem after technology is more advanced?” Ackerman responded “I’ve said all that I’m going to say on that subject.”

Ackerman’s point of view that economists were infallible and their suggestions should be adopted uncritically by voters was called into question by the fact that the group neglected to book the most popular speakers, such as Thomas Piketty, into sufficiently large rooms and, though they were videotaping the talks, did not have any provision to show the videos in real-time on screens in lobbies or other rooms. If the nation’s top economists can’t estimate demand for talks by economists can we trust them to tell us what to do about global warming?

Ackerman’s point of view that it is obvious what to do was called into question by the diversity of papers at the conference. Adapting to increased atmospheric CO2 may turn out to be much cheaper than reducing atmospheric CO2, depending on which paper you read (see “Climate Change Impacts on United States Agriculture: Accounting for the Option Value of Farmland in the Hedonic Approach” by Ortiz-Bobea, for example: “New results suggest no damages – and possibly benefits- of climate change on the sector, which is in contrast to large damages found in other studies.”). Taking a ton of CO2 out of the atmosphere might be a lot cheaper 15 years from now compared to today (one of my favorite books is The Path Between the Seas, about the construction of the Panama Canal; the late 19th century project failed while the early 20th century project succeeded mostly due to improved steam shovels and an understanding of the role of mosquitoes as disease vectors). As a technologist I love the idea of new energy technology (see my 2008 posting on converting all U.S. cars to electric), but do I have a rational financial basis for this love? And if someone disagrees with me, do I get to call them a racist because there is a black politician who likes the same technology that I like?

The idea that we should put our faith in the U.S. Government is not supported by the papers at the conference. “An Imperfect Storm: How FEMA, Private Hurricane Insurers, and Climate Change Can Create Inefficient Coastal Housing Markets and Impose a Burden on Inland Taxpayers” (Conte and Kelly) shows that subsidized flood insurance “increases coastal development, which when combined with climate change and slow learning, creates a multiplicative effect which ‘fattens the tail’ of the hurricane damage distribution.” Taxpayer-subsidized crop insurance, similarly, discourages adaptation.

There may be a market opportunity for an economist to write a big Piketty-style book on climate change. Even if one were to assume no uncertainty regarding future temperatures on our planet as a function of CO2 emissions there is a huge amount of inquiry to be done on the best course of action for the world as a whole and for each country in particular. The range of estimates of the cost of each additional ton of CO2 spewed into the atmosphere seems currently to be between about $10 and $900. There is no agreement on what discount rate to use to model the value of an improved economy or environment 50 or 100 years from now. There does not seem to be any convincing analysis of how the cost of pulling a ton of CO2 out of the atmosphere (or refraining from putting one in) is likely to vary over time. Tightening up these numbers in a convincing way would be a great achievement. Finally, incentives and games are often studied by economists. The book needs to explain how to ensure that countries won’t cheat on carbon emissions.

16 thoughts on “Two big questions for economists today

  1. >Can higher education make a person more productive at his or her ultimate job?

    The answer depends on what person and what job and what education. For example, my daughter is studying engineering at MIT. I have no doubt that she will be a much more productive person after receiving this training than she would have been without it. Zero doubt.

    Now if Jane (a hypothetical person) receives a degree in gender studies at Podunk State University, the effect on her lifetime productivity is likely zero (or even negative, especially if you account for the 4 years she is out of the workforce while earning this degree).

    The problem in our society is that there is no serious attempt to draw a cutoff – to say, you Scott are not college material, and you, Shady State College English department are a waste of time. The worst sin in modern society is being “judgmental” so we have to pretend that no person or school or program is any better or worse than any other.

  2. Q: what’s the difference between micro-economists and macro-economists?
    A: micro-economists are people who are wrong about specific things, while macro-economists are people are wrong about things in general.

  3. Many very good points. It should be noted that we do not live in perfect market economy. The government in its many forms is more than willing to hire marginal college graduates and pay them good salaries. You cannot be a teacher in a public school without a college degree, but that degree may very well be in a field of little value in the private sector and acquired at a marginal school. As you mention, for jobs that require a license, the means by which such license was obtained, as long as they are legal, do not matter much. Get a degree in history with a C average from Mariachi University and you still can teach history (or perhaps even other subjects) in a public school (after passing some easy examinations perhaps). Teachers (and that is just an example of a good government job requiring a college degree) make good money and have excellent benefits.

  4. There are a couple of simple points to consider regarding the issue of higher education and the economy. I’ve seen statistics that show that about 20% of jobs in the US require a college degree. However, around 30% of Americans of working age have a bachelor’s degree. So we send far too many young people to college and we’ve been doing so for decades. This represents a vast waste of resources.

    I also see that you take the federal government to task for the vast amount of funding that it provides to colleges and universities. You also assume, perhaps correctly, that that funding has driven up tuitions. One thing that you need to keep in mind is that a majority of degrees granted in America are granted by state universities, where tuition typically covers only about half the cost of the education received by the student. The taxpayers of the states pick up the other half. There’s a strong argument that the state governments are not making a sufficient effort to control costs at their universities.

  5. Philip,

    It seems to me that in the US, the sole purpose of a university education is as a job credential vehicle and the politicians would like it to be a job training vehicle.

    In continental Europe there is a sharp distinction between university and technical school (the Technische Hochschulen). The latter kind of institutions teach a specific craft (in Germany, at a very high level), often in, but not limited to, the engineering disciplines, whereas a university is supposed to, in theory, train people more broadly.
    (Here’s a rough indictment: undergraduate university education in the US seems to do neither very well.)

    In America, there’s really no place that one case systematically learn a craft, such as say, antique furniture restoration. Indeed, craft is dead.

  6. Many occupations which don’t (or shouldn’t) necessarily require “higher” education are nonetheless becoming more technical over time. Yet it seems like the U.S. almost entirely ignores education beyond high school which is not college. Philip points out that we are teaching some people the wrong way. Perhaps we are also teaching some people the wrong things.

  7. John: There are actually a handful of craft schools left! is one. But my point wasn’t that people who don’t thrive in a lecture environment should be pushed into a trade or technical school. It was that the topics taught in a lecture environment should be taught via an apprenticeship, for example, or via project-based learning.

  8. Bryan Caplan has some well collected research on the topic, particularly the expected returns for various majors, and the college or no college question.
    He finds strong support for a signalling model of college where employers look for the credential of the degree to show the student will be compliant and reasonably smart. The lack of a large benefit for having 3 years of a 4 year degree indicate that the effect of learning (improved human capital) in college is small to nonexistent.

  9. Most of the traditional Technische Hochschule in the engineering field in Germany have been renamed Technische Universität and give the right to award doctoral decrees. The Hochschule that remain award only bachelors or masters degrees. Some are denominated Hochschule für angewandte Wissenschaften (Colleges of Applied Science) or Fachhochschule (professional college) and others are art schools (Kunsthochschulen) or other specialized schools (theology, etc.). Even though both T.U. and HAW both award engineering degrees, the HAW are more oriented toward internships and hands on practical training. In the US, MIT would be a TU and Drexel (at least in the old days before Drexel became more ambitious) would be a HAW. Trades are taught in Berufsschule (vocational/professional schools) which do not award academic degrees and usually operate in conjunction with apprenticeships.

    We certainly could profit from emulating certain aspects of the German system where those who are not “University” material still get real and useful training in practical fields that will lead directly to a job. But it is worth noting that there are few German universities in the top rank of world universities. In the Shanghai Rankings, the #1 German university (Heidelberg) appears as #49 in the world, after UC Irvine. To some extent, German universities never really recovered from Naziism and the expulsion of their Jewish faculty members. I suppose that if you were to strip all the Jewish faculty out of American universities that would bring them down quite a few notches also, but it’s amazing that this effect still lingers after 70 years.

  10. A career in science will cost you your first born:

    This is a microcosm of the compression of the standard of living occurring across our civilization. Because our human brains are stuck in the fixed hierarchy of past systems, we are not equipped to accommodate ever more intelligent and larger populations. The people at the top (by virtue of their seniority, power and control) therefore compress the ever growing collection of new people into a poorer flatter socioeconomic stratum. As the subservient population grows, so does the perceived power of those who think they control them. The tools being used are stratospherically rising prices to education and prolonged avenues of training. The administrative powers have no incentive to improve the system because that will only diminish their control, power and utility.

    We have been traveling in these dark ages now for quite some time and are overdue for an enlightenment. Before the renaissance, feudalism was pervasive and the distinction between the upper 1% and the remaining population was vast and stark. The myriad opportunities for middle class, prosperous happy technicians, merchants, and technocrats came with the empowerment of individuals to mold and change their world with tools and technology. Everyone benefitted, even the wealthy.

    But now it seems, the old formula no longer works. New discoveries are too complex to be made by an individual, New tools cannot be crafted without an army of patent lawyers, and new technologies cannot be implemented without environmental impact studies and regulations. Since we cannot augment a human brain to operate effectively in this more complex world as an individual, we have a choice: either we need to make new simpler worlds for us to grow into – or we need to fundamentally change our biology so we are more cooperative instinctively.

    Without a positive vision for the future, unhappy individuals will poison the well for us all.

  11. The comments seem to focus on the education portion of your post but in regards to the climate economics, my thought is the solutions are actually already solidifying. Or at least, I’m hopeful they are. For example I started a digital-asset based, carbon offset emission credit idea, and run it as a hobby in my spare time. The asset itself is a digital bearer instrument (bitcoin clone) where Renewable producers, such as home solar array owners, that join the network (website) sign up and receive coins for free pro rata to their carbon mitigated production. This generates a carbon offset that can be quantified and then owned, traded and bought and sold among individual players (free market). Because it’s basically a the marriage of a peer-to-peer software protocol (the coin) and the network (a website), it is massively scalable at almost no cost (or certainly low cost when compared to massive cap and trade and carbon tax systems).

    This put a private market value on carbon. When I read your comment about a tonne of carbon being worth somewhere between “$10 and $900,” that’s when I wanted to chime in with this post. That comment is exactly right – 1) no one knows the true value of carbon; 2) carbon is a global problem so imaginary borders are irrelevant meaning that, 3) if governments are going to solve the problem they need to work together (currently a non-starter) and 4) there can’t be an incentive for countries to cheat, and lastly, 5) private market solutions are in their infancy, the market size is massive (we’re talking trillions of dollars huge) and right now, quite frankly, no one owns any of it.

    If you only incentivize renewable production (solar electricity, properly accounted for biofuel, etc etc) without “punishing” existing forms of fossil, carbon-positive production (coal, oil, gas) there is nothing to cheat: coal production simply doesn’t get rewarded. A carbon emission offset credit simply becomes a fungible commodity; a value placed on certain types of useful production by an open-market of global players that they chose to value over others (e.g., solar versus coal). For the first time, Society can say this kWh and that kWh are different: 1,000 g CO2 (coal) emitted versus solar’s 46 g, so the solar guy gets 954 g worth of emission credits. This is what I’m doing, signing up Producers (mostly home solar guys so far) and distributing coins in exchange for their exclusive meter data that I use to calculate the carbon offset of their production, which is the base value of the asset. It currently trades on the open market at $186/t CO2. I found the “$10 to $900” comment interesting for this reason. It is interesting to me (and maybe also to economist/environmentalist types out there) to see if such a small ecosystem with only a few players may actually be within “the actual price of carbon,” to a first approximation.

    Since I do this in my off-hours and it’s really just me on the project, I can’t imagine there are not many different types of these ideas currently bubbling up to take a stab at re-framing, and then ultimately solving the global carbon issue, with far more resources to bare. I’m no economist so I’ll save the Picketty paper for someone else, but here’s the whitepaper:

  12. @Izzie L.: The reason why there are “few German universities of top rank” in most research-heavy rankings is that in Germany (and indeed China and Russia) the professional academic researchers who write papers for a living aren’t affiliated with the universities but with scientific academies. Thus grading the University of Heidelberg by the impact factor of their papers is a bit silly because the research (doctoral, postdoc and professional) happens in the Max Planck Institute and the Fraunhofer Institute next door.

  13. “Can higher education make a person more productive at his or her ultimate job?”

    Wrong question, especially from an economist. That should be formulated as “Can higher education make a person sufficiently more productive at their ultimate job to pay for their education and for the forgone income for the time spent obtaining it?” This, of course, assumes that the primary purpose of education is job training. This subject was covered well in “Should Railroad Men Be College Men” (Thwing, 1902).

    There is an argument that we need an educated citizenry to make the right decisions in choosing leaders. This seems archaic today. That it seems archaic is a problem. A big one. But that’s a longer subject than we have time for today.

    There is a more modern problem – computers are getting smarter and are already very cheap. This is producing a new approach to work: “Machines should think. People should work”. An Amazon warehouse is an excellent example. Machines do all the organizing, planning, and decision making. Humans just walk around picking up the items the machines tell them to. In newer warehouses, robots eliminate the walking around, and humans just take things out of bins presented to them by robots and put them in other bins. Robots to do that are under development.

    Economists have been worried about mechanization since the power loom. But until recently, machines were specialized and expensive, able to take over only one job area at a time. Computers are general-purpose, cheap, and communicate well with each other. This is a fundamental change in the nature of work.

    Teach one human to do a task, and you have one trained human. That teaching must be repeated for each human. Teach one computer to do a task, and millions of computers can now do that task. That’s what’s different this time.

  14. Can higher education make a person more productive at his or her ultimate job?
    But the real questions are:

    What job. There is no job (position) for life.
    And most jobs are job specific and not learnable or predictable in school.

    How to have access to higher education.
    The future is free online knowledge for the skilled and motivated people and available “just in time”. No fight through expensive and annoying years of irrelevant academic bullshit.

    What do you really want to do in life. This changes with personal, social and technological evolution.

    How much of a society’s resources should be put into reducing CO2 emissions?
    Nothing. Instead the energy mafia should be eradicated,
    The relation between CO2 and climate is a lie. Look at the new (and if possible unfalsified) data. The sun activity drives the climate.
    The CO2 climate modeling becomes more and more complicated because the relationship between climate and CO2 was only seemingly.
    The CO2 concentration exploded while the temperature changes are still very small.
    See also:

  15. Re Education: I found your argument a bit hard to follow. It seems as though your economics come down to whether someone who isn’t particularly inclined toward academics has college actually makes more money than someone who doesn’t. Is the loss of four years of wages worth it?

    From my experience as an educator teaching in the Cal State and U Mass system, seeing young people come to life around ideas and insights after they’ve been essentially relegated to employment where they are supposed to act as cogs in the wheel of the mighty machine of dying, late-stage capitalism has been a revelation and an inspiration.

    The notion that income is the primary measure by which the value of education is to be measured is profoundly off base, as far as I’m concerned. Having lived through a revolutionary period in the late 60s and early 70s, I am quite aware of the fact that things don’t always work out like we think they will. If the function of education is to prepare young people for employment, it better teach them something about thinking for themselves and finding themselves because the jobs that are in the foreground today may yield to something quite different as the context we’re living in emerges and alters our expectations and mind sets.

    You mention Piketty. Here is the theme to which he returns repeatedly in Capital in the 21st Century:

    “The principal mechanism for convergence at the international as well as the domestic level is the diffusion of knowledge….The poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming wealthy….Above all knowledge diffusion depends on a country’s ability to mobilize financing as well as institutions that encourage large-scale investment in education and training of the population while guaranteeing a stable legal framework that various economic actors can reliably count on. It is therefore closely associated with the achievement of legitimate and efficient government. Concisely stated, these are the main lessons that history has to teach about global growth and international inequalities.”

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