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 monster.com) 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
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
Full post, including comments
). Thus there would be no difference in damage to the environment from using Tide to wash clothing versus some other brand. Ditto for Cascade versus some other brand of dishwasher detergent. Now that phosphates have been more or less banned there isn’t a distinction among detergents based on phosphate content. Yet Whole Foods carries a whole aisle of detergents whose labels imply that somehow the Earth will be better off if I buy those brands, e.g., Seventh Generation, rather than the poisonous products of 
that my friend Gary loves is the best option).