Category: Education
Are CEOs paid their value added?
Remember Paul Krugman’s forays into “the wage reflects what the top earners are really worth” topic, and the surrounding debates? Why should this discussion be such a fact-free zone? Why so little discussion of tax incidence?
Let’s start with the literature.
Read this paper by Kevin Murphy (pdf), especially pp.33-38. Admittedly the paper is from 1999 and it won’t pick up the more recent problems with the financial sector. But most of the data are from plain, ol’ garden variety CEOs. In many of the estimations we see CEOs picking up less than one percent of the value they create for the firm, and all of the estimates of their value capture are impressively small, albeit rising over time. Never is the percentage of value capture anything close to one hundred percent. “One percent value capture” is an entirely plausible belief.
You might think this sounds whacky but it makes theoretical sense. For instance often CEO performance is motivated by equity and options, but few CEOs are wealthy enough to own more than a very small chunk of the company (risk-aversion may be a factor too), and that will mean their pay won’t reflect value created at the margin. It’s a standard result of agency theory, stemming from first principles.
Maybe you’re suspicious of this work but the way these estimates are done is quite straightforward, and results of this kind have not been overturned. You can formulate a “pay isn’t closely enough linked to performance” critique from these investigations, but not a “they’re paid as much as they contribute” conclusion or anything close to that. (And, if it matters, the “conservative” and also WSJ Op-Ed page view has embraced these results for almost two decades, at least since the original Jensen-Murphy JPE piece; Krugman identified the conservative position with the Clarkian perfect competition w = mp stance but that is incorrect.)
You might be thinking “Ha! Burn on Krugman!,” but not so fast. Like Wagner’s music, Krugman’s position here is “better than it sounds,” though not nearly as strong as Krugman would like it to be.
Let’s turn to taxation of the top 0.1 percent, and focus on these CEOs. If the tax rate on their income/K gains goes up, the firm will compensate by giving them more equity/options, to keep them working hard. In other words, the tax rate on the top earners can be hiked without much effect on CEO effort because there is an offset internal to the firm. At some margin the firm’s shareholders will be reluctant to chop off more equity/options to the CEO, but the marginal value created by maintaining the incentive seems to be very high, for reasons presented above, and so the net CEO incentives will be maintained, even in light of new and higher taxes on CEO earnings.
But here’s the problem, if that’s the right word. The incidence of that tax is going to fall on shareholders in general and thus on capital in general. These top CEOs could even get off scot-free, if the shareholders up the equity/options participation of the CEO to offset completely the effects of the new and higher tax rate. This is also relevant to the Piketty-Saez-Stantcheva analysis that everyone has been talking about; they don’t see these mechanisms with sufficient clarity.
Moral of the story: it’s harder to tax the top earners than you think.
The second moral is that tax incidence remains a neglected topic, even among top economists.
The third moral is that too many people, including both Krugman and his critics on this point, have been neglecting the literature.
By the way, other assumptions can be made and other results generated, but I am focusing on one of the core cases.
Model this
Students in George Parrott’s psychology courses have an unusual requirement: they must bring homemade snacks each week to the laboratory section, and they need to work out a schedule such that groups of students make sure each session is covered, and that snacks aren’t repeated from week to week. If there are no snacks, Parrott walks out of his class at California State University at Sacramento, and the students lose that week’s instruction.
Parrott has been teaching at the university since 1969. He says he started this requirement a few years after he arrived — and that most students have appreciated the ideas behind the rule (which he says are more educational than culinary). But on Thursday, when students in the morning section of Foundations of Behavioral Research didn’t bring muffins (or anything), he enforced his rule. He left class and took his teaching assistant to breakfast. One of the other sections missed its snack obligation one day last month, and he left that class, too. Ever since, the snack schedule has been followed by the students in that class.
I snickered at this sentence:
This is Parrott’s last semester before retirement, but his teaching technique — in use for more than 30 years — is now being subjected to scrutiny.
Here is more.
Doctors with Borders
It’s hard to know what is worse about a new paper in the British Medical Journal, the simplistic economics or the troubling ethics. The paper, The financial cost of doctors emigrating from sub-Saharan Africa, adds up the government-paid cost of educating a health worker in Africa and then multiplies that cost over ~33 years by an investment factor to find the “losses” to the educating country of educating a health worker who emigrates to Canada, the US, the UK, or Australia. The authors do this for nine sub-Saharan African countries with an HIV rate of 5% or greater or more than one million people with HIV/AIDS.
The numbers, by the way, are quite small since the cost of education in developing countries is low and because our laws make it difficult for workers to immigrate, thus the authors find just 567 doctors from Ethiopia currently practicing in the four western countries that they consider; n.b. 567 is the total number not an annual flow. (Note also that the authors gin up the costs by multiplying by an investment factor which adds virtually nothing to the analysis and confuses present and future value calculations.)
You can get an idea of the quality of this paper by asking why the authors chose to focus on countries with high HIV rates. The only reason for this is to suggest that doctors who emigrate and the countries that attract them are responsible for millions of deaths. See below.
Turning to the simplistic economics we have first the suggestion that there is a fixed number (flow) of health care workers so if the U.S. were to forbid Ugandan health care workers from emigrating to the United States this means more health care workers for Uganda. Not so; without the prospect of high wages earned abroad, investment in education (the major cost of which is born by the worker) will likely decline. The Philippines “exports” more nurses than any other country but also has far more nurses than one would expect for a country of its income class, on par with that of Spain, Hungary or Singapore. Here is Michael Clemens:
…there is no such thing as a fixed quantity of nurses to be “drained” from the Philippines or Africa, like petroleum from the ground. People — in this case mostly low-income women — react to global markets and change their career plans accordingly. Many Filipinas wouldn’t have become nurses if not for the migration opportunity, and thus are not ‘lost’ in any sense when they depart. Africans are starting to follow suit, opening career paths for professional women who would otherwise have few. This should not be discouraged through closed immigration policy, but rather taken advantage of — through the establishment of for-export nurse training programs as the Philippines has done en masse. Unlike petroleum, these women are human beings. They have rights and ambitions whose fruition in the United States is a beautiful thing.
Even on their own terms the authors calculations are faulty. Emigrating workers, for example, don’t leave immediately after they have finished their education (as the authors assume in their primary analysis), there are fixed costs to building an education infrastructure which can reduce the costs of education for non-emigrating workers and emigrating workers often send remittances back to the home country. Not all emigrating workers send remittances but wages for high-skill workers can be five or even ten times higher in say the U.S. than in a sub-Saharan African country so educating workers and sending them abroad could be a net benefit for the educating country just based on remittances. Indeed, many families make exactly this calculation. Finally, the authors don’t even try to measure externalities which is what they should be measuring.
What is most ethically troubling is that the authors implicitly treat people as if they were the property of the state. Thus, an emigrating physician is a loss even though the physician improves his life prospects and those of his children. Development is about making people better off not about making geographic units “better off.”
Lest you think that I exaggerate consider that the lead author of this paper is also the lead author of an editorial in the Lancet that advocates making it an international crime to hire African workers.
Although the active recruitment of health workers from developing countries may lack the heinous intent of other crimes covered under international law, the resulting dilapidation of health infrastructure contributes to a measurable and foreseeable public-health crisis….There is no doubt that this situation is a very important violation of the human rights of people in Africa.
…Active recruitment of health workers from African countries is a systematic and widespread problem… the practice should, therefore, be viewed as an international crime.
Yes, you read that correctly: recruiting African workers with prospects of higher wages and a better life is a “very important violation of the human rights of people in Africa.”
Addendum: See this excellent paper by Michael Clemens for more on these issues.
I’m not saying we should do this!
China’s Ministry of Education announced this week plans to phase out majors producing unemployable graduates, according to state-run media Xinhua. The government will soon start evaluating college majors by their employment rates, downsizing or cutting those studies in which less than 60% of graduates fail for two consecutive years to find work.
The move is meant to solve a problem that has surfaced as the number of China’s university educated have jumped to 8,930 people per every 100,000 in 2010, up nearly 150% from 2000, according to China’s 2010 Census. The surge of college grads, while an accomplishment for the country, has contributed to an overflow of workers whose skillsets don’t match with the needs of the export-led, manufacturing-based economy.
One of the targeted sectors might be biology, whose majors are not currently finding good jobs. But is that the right decision for the future of China? Here is yet another problem with the plan:
An op-ed in the Beijing News criticizes the approach for a different reason, saying that it will only spur false reporting of employment rates from schools that are looking for greater autonomy to produce more diversified, higher qualified students.
By the way:
What if the U.S. government were to adopt China’s approach? According to the most recent U.S. census data, among the first majors to go: psychology, U.S. history and military technologies.
For the pointer I thank Samuel Oehler.
Betting markets in everything
A new website is assembling what it calls “the world’s best economics department” in a bid to give prominent academic economists a louder and unfiltered voice in key public-policy debates.
The site, run by the University of Chicago Booth School of Business, plans to pose one question a week and post answers from 40 senior professors at elite U.S. universities. The site went live Sunday, though the panel has been responding to questions for the past few weeks.
Alas, I cannot check the “weblogs” category for this post. The David Wessel article is here, the website itself is here. Let’s bet: pick your metric, how many site visits (or whatever) will they be pulling in six months from now? I bet Scott Sumner beats them with one hand tied behind his back.
Sumner on Yglesias
PS. Congratulations to Matt Yglesias on his new gig. He’s arguably the best progressive economist in the blogosphere, which isn’t bad given that he’s not an economist. I said “arguably” because Krugman’s a more talented macroeconomist. But Yglesias can address a much wider variety of policy issues in a very persuasive fashion. So he’s certainly in the top 5. His blog is the best argument for progressive policy that I’ve ever read. (But not quite persuasive enough to convince me.)
Scott writes more, on the euro.
Sentences to ponder
It is estimated that up to 40 percent of prescriptions go unfilled…
That is from Ezekiel J. Emanuel, here is more. I read somewhere that Zeke has a memoir under contract somewhere, but now Google fails me. Can this be true?
The Bond Market on Education
…Stark Investments is staying away from all student loan bonds right now. It is instead focusing on mortgage-backed debt with comparable yields and less risk…
You know it’s a bad job market when bond investors would rather invest in mortgages than students. As the article in the WSJ notes, investors in student loans have an incentive to be realistic about the value of education and the job market.
Investors like Mr. Ades have a unique view on the future for America’s job-seekers. Their investments depend on accurately predicting young people’s ability to repay their loans, which means they obsess about everything from employment rates by profession to the long-term earning potential of young graduates.
Historically, investors have assumed 25% to 30% of student loans bundled into their bonds will default. But today they are baking in between 30% and 40% default rates among the current crop of graduates…
Not every investment in education is a poor bet:
…This analysis translates into some surprising insights for students and policy makers. For example, in the current economy, it may make more sense to enter a technical college than to go to law school.
…”It’s not just about where you can get the best education,” he said during an interview in the Miami Beach office of his hedge fund, Kawa Capital Management. Students should pick schools where the payoff from higher salaries upon graduation exceeds the cost of the education by the widest margin, he contends, especially when the job market contracts.
By that arithmetic, technical colleges come out on top, Mr. Ades said. “We’re in a skills based economy and what we need is more computer programmers, more [nurses],” he said. “It’s less glamorous but it’s what we need.”
Turning the dialogue from wealth to values
My latest column is about the top one percent, and OWS, here are some paragraphs, including the last three:
The United States has always had a culture with a high regard for those able to rise from poverty to riches. It has had a strong work ethic and entrepreneurial spirit and has attracted ambitious immigrants, many of whom were drawn here by the possibility of acquiring wealth. Furthermore, the best approach for fighting poverty is often precisely not to make fighting poverty the highest priority. Instead, it’s better to stress achievement and the pursuit of excellence, like a hero from an Ayn Rand novel…
But how is that playing out in practice?
For one thing, today’s elites are so wedded to permissive values — in part for their own pleasure and convenience — that a new conservative cultural revolution may have little chance of succeeding. Lax child-rearing and relatively easy divorce may be preferred by some high earners, but would conservatives wish them on society at large, including the poor and new immigrants? Probably not, but that’s often what we are getting.
In the future, complaints about income inequality are likely to grow and conservatives and libertarians won’t have all the answers. Nonetheless, higher income inequality will increase the appeal of traditional mores — of discipline and hard work — because they bolster one’s chances of advancing economically. That means more people and especially more parents will yearn for a tough, pro-discipline and pro-wealth cultural revolution. And so they should.
It remains to be seen how many of us are up to its demands.
It will be very interesting to see, if labor market polarization continues, what kind of disciplinary alternatives will be offered. How about a boot camp, or a neo-Victorian boarding school, to turn your kid into a successful engineer? My admittedly counterintuitive view is that growing income inequality will provide a big boost to cultural conservatism, and perhaps political conservatism too, albeit at levels which are often rhetorical rather than real.
There is much more in the column itself, including a discussion of what Stiglitz, Sachs, Ayn Rand and modern American conservatives get right and wrong. I’m a big fan of the pro-wealth, pro-discipline ethic, although I don’t think that current intellectual discourse is serving up an especially palatable version of it.
I should add that for this column I am grateful for a conversation with John Nye.
Addendum: Mark Thoma comments, as do his commenters, always worth reading.
And the actuaries shall eat
In the debate on unemployment, Ryan Avent makes a common move (related post from Matt here, and Fabio here and Adam here), though I think an incorrect one:
It is remarkable to me how readily old, successful professionals dismiss the labour-market difficulties of young adults as the product of their poorly-chosen majors and general lack of ambition, and on what flimsy evidence they’re prepared to base these views. There are now 3.3m unemployed workers between the ages of 25 and 34. That’s more than twice the level in 2007. There are over 2m unemployed college graduates of all ages; nearly three times the level of 2007. There are many millions more that are underemployed—unwillingly working less than full-time or unwillingly working in a job outside their field which pays less than jobs in their field. As far as I know, the distribution of college majors didn’t swing dramatically from quantitative fields to art history over the past half decade.
The general form of the argument is: “only x changed, therefore x is the cause.” A supply and demand graph, with the shift of one curve, shows that argument to be false. The net effect of the shift will depend, for one thing, on the slope of the other curve, plus whether the other curve has been shifting (more slowly) all along.
A similar kind of argument is applied to the eurozone. Since “things were fine” in year ????, the current crisis can’t be about structural problems in the underlying European model, yet in part it is, for reasons of resiliency and robustness.
Going back to unemployment, labor market opportunities for college grads have been eroding — except for the elite — in absolute terms since 1997-2000, well before the collapse in AD. If those same grads are highly willing to be geographically mobile, highly willing to consider actuarial training, and highly willing to take tougher courses and study where the jobs are (doesn’t have to be tech subjects, some of those are failing too), the unemployment response to a given AD shock will be much lower. But they aren’t, so it isn’t. I’ve seen only small adjustments in the ambition and flexibility of college goers, not enough preaching about TGS I suppose.
In an era where both monetary and fiscal policies have underperformed, looking at both sides of the market is essential.
You can even give this all a Keynesian take (though I would prefer a TGS framework). Since 1997-2000, there is downward pressure on lots of wages, but morale matters and labor market incumbents retain a favored position. Though some wages fall, employers resist that downward pressure, and pass along a lot of the burden of adjustment to new job seekers. Even if that original downward pressure on wages is smallish, new job seekers have to make big adjustments in their career plans, majors, ambitions, etc. to get through the door at all. They didn’t.
That’s the same argument that Keynesians cite and indeed insist upon in other contexts. It is somewhat harder to see when you start with a slower erosion in real wage opportunities, rather than a sudden AD shock, but it doesn’t make sense for Keynesians to dismiss it.
The real issue, I suspect, is that many people are allergic to arguments which appear to “blame” the job seekers, rather than government inaction, but it’s not about blame one way or the other. It’s about the desire to have a fuller and better model, with richer causal chains, and to see through all the variations to a deeper level.
To put it rather immodestly, my arguments are a lot stronger than many people think!
Facts about education
Here is one:
In 2003, the first year the Babson group and Sloan-C conducted the survey, 57 percent of academic leaders estimated that learning outcomes in online courses were equal or superior to those of face-to-face courses. This year, the figure was 67 percent.
From Peter Orszag, writing about budgetary pressures, here is another:
Some admittedly imperfect indicators suggest the quality of public higher education is already fading. For example, in 1987, both UC Berkeley and the University of Michigan were included in U.S. News & World Report’s ranking of the top 10 universities. By this year, there were no public universities in the top 10 — and UC Berkeley, the top-ranked public school, had fallen from fifth to 21st.
Put these two facts together, and what is your prediction?
Who gets what wrong?
My colleague Daniel Klein reports from the front:
…under the right circumstances, conservatives and libertarians were as likely as anyone on the left to give wrong answers to economic questions. The proper inference from our work is not that one group is more enlightened, or less. It’s that “myside bias”—the tendency to judge a statement according to how conveniently it fits with one’s settled position—is pervasive among all of America’s political groups. The bias is seen in the data, and in my actions.
And what do the “right-wing” thinkers get wrong?
More than 30 percent of my libertarian compatriots (and more than 40 percent of conservatives), for instance, disagreed with the statement “A dollar means more to a poor person than it does to a rich person”—c’mon, people!—versus just 4 percent among progressives. Seventy-eight percent of libertarians believed gun-control laws fail to reduce people’s access to guns. Overall, on the nine new items, the respondents on the left did much better than the conservatives and libertarians. Some of the new questions challenge (or falsely reassure) conservative and not libertarian positions, and vice versa. Consistently, the more a statement challenged a group’s position, the worse the group did.
A college education, by the way, doesn’t help much. Here is another statement of the conclusion:
A full tabulation of all 17 questions showed that no group clearly out-stupids the others. They appear about equally stupid when faced with proper challenges to their position.
That’s a lesson David Hume would have appreciated.
Very good sentences
I make no apologies for ignoring these little toy models, and having my policy analysis incorporate a complex mixture of politics, macroeconomic history, well-established basic economic principles, and logic.
Not From The Onion
Here’s an astounding illustration of my argument that “American students are not studying the fields with the greatest economic potential.”
The Nation: A few years ago, Joe Therrien, a graduate of the NYC Teaching Fellows program, was working as a full-time drama teacher at a public elementary school in New York City. Frustrated by huge class sizes, sparse resources and a disorganized bureaucracy, he set off to the University of Connecticut to get an MFA in his passion—puppetry. Three years and $35,000 in student loans later, he emerged with degree in hand, and because puppeteers aren’t exactly in high demand…he’s working at his old school as a full-time “substitute”…[earning less than he did before].
…Like a lot of the young protesters who have flocked to Occupy Wall Street, Joe had thought that hard work and education would bring, if not class mobility, at least a measure of security…But the past decade of stagnant wages for the 99 percent and million-dollar bonuses for the 1 percent has awakened the kids of the middle class to a national nightmare: the dream that coaxed their parents to meet the demands of work, school, mortgage payments and tuition bills is shattered.
What astounds me is not that someone could amass $35,000 in student loans pursuing a dream of puppetry, everyone has their dreams and I do not fault Joe for his. What astounds me is that Richard Kim, the executive editor of The Nation and the author of this article, thinks that the failure of a puppeteer to find a job he loves is a good way to illustrate the “national nightmare” of the job market. Even in a wealthy society it’s a privilege to have the kind of job that Kim thinks are the entitlement of the middle class. And, as Tyler says, we are not as wealthy as we thought we were.
In considering the plight of the puppeteer lets also remember that millions of the unemployed would be grateful to have a job that they don’t like.
By the way, should you be so inclined, Therrien has a Kickstarter project where you can voluntarily donate to create “a nationwide flowering of spectacle puppet theater joyously spreading a new public consciousness!” You may also wish to know that according to Mike Riggs at Reason:
The pro-puppet American Recovery and Reinvestment Act doled out $50,000 to the Center for Puppetry Arts in Atlanta; $25,000 to the Sandglass Center for Puppetry and Theater Research in Vermont; and $25,000 to the Spiral Q Puppet Theater in Philadelphia.
The study of science is hard
The excitement quickly fades as students brush up against the reality of what David E. Goldberg, an emeritus engineering professor, calls “the math-science death march.” Freshmen in college wade through a blizzard of calculus, physics and chemistry in lecture halls with hundreds of other students. And then many wash out.
Studies have found that roughly 40 percent of students planning engineering and science majors end up switching to other subjects or failing to get any degree. That increases to as much as 60 percent when pre-medical students, who typically have the strongest SAT scores and high school science preparation, are included, according to new data from the University of California at Los Angeles. That is twice the combined attrition rate of all other majors.
Could it be that too many people like being the smartest one in the room? Or is it some other explanation?:
“But if you take two students who have the same high school grade-point average and SAT scores, and you put one in a highly selective school like Berkeley and the other in a school with lower average scores like Cal State, that Berkeley student is at least 13 percent less likely than the one at Cal State to finish a STEM degree.”
Here is the story, here is Alex’s earlier post. Science itself is even harder.