In Why Are The Prices So D*mn High? Helland and I examine lower education, higher education and health care in-depth and we do a broader statistical analysis of 139 industries. Today, I will make a few points about education. First, costs in both lower and higher education are rising faster than inflation and have been doing so for a very long time. In 1950 the U.S. spent $2,311 per elementary and secondary public school student compared with $12,673 in 2013, over five times more (both figures in $2015). The rate of increase was fastest in the 1950s and 1960s–a point to which I will return later in this series.
College costs have also increased dramatically over time. For this book, we are interested in costs more than tuition because we want to know what society is giving up to produce education rather than who, in the first instance, is paying for it. Costs are considerably higher than tuition even today, although in recent years tuition has been catching up. Essentially students and their parents have been paying an increasing share of the increasing cost of higher education. Moreover, as with lower education, costs have been rising for a very long period of time.
I will take it as given that the explanation for higher costs isn’t higher quality. The evidence on tests scores is discussed in the book:
It is sometimes argued that how we teach has not changed but that what we teach has improved in quality. It is questionable whether studies of Shakespeare have improved, but there have been advances in biology, computer science, and physics that are taught today but were not in the past. However, these kinds of improvements cannot explain increases in cost. It is no more expensive to teach new theories than old. In a few fields, one might argue that lab equipment has improved, which it certainly has, but we know from figure 1 that goods in general have decreased in price. It is much cheaper today, for example, to equip a classroom with a computer than it was in the past.
The most popular explanation why the cost of education has increased is bloat. Elizabeth Warren and Chris Christie, for example, have both blamed climbing walls and lazy rivers for higher tuition costs. Paul Campos argues that the real reason college costs are growing is “the constant expansion of university administration.” Redundant administrators are also commonly blamed for rising public school costs.
The bloat theory is superficially plausible. The lazy rivers do exist! But the bloat theory requires longer and lazier rivers every year, which is less plausible. It’s also peculiar that the cost of education is rising in both lower and higher education and in public and private colleges despite very different competitive structures. Indeed, it’s suspicious that in higher education bloat is often blamed on competition–the “amenities arms race“–while in lower education bloat is often blamed on lack of competition! An all-purpose theory doesn’t explain much.
More importantly, the data reject the bloat theory. Figure 8 shows spending shares in higher education. Contrary to the bloat theory, the administrative share of spending has not increased much in over thirty years. The research share, where you might expect to find higher lab costs, has fluctuated a little but also hasn’t risen much. The plant share which is where you might expect to find lazy rivers has even gone down a little, at least compared to the early 1980s.
Nor is it true that administrators are taking over the public schools, see Figure 10.
Compared with teachers and other staff, the number of principals and administrators is vanishingly small, only 0.4 per 100 students over the 1950–2015 period. It is true, if one looks closely, that the number of principals and administrators doubled between 1970 and 1980. It is unclear whether this is a real increase or a data artifact (we only have data for 1970 and 1980, not the years in between during this period). But because the base numbers are small, even a doubling cannot explain much. A bloated little toe cannot explain a 20-pound weight gain. Moreover, the increase in administrators was over by 1980, but expenditures kept growing.
If bloat doesn’t work, what is the explanation for higher costs in education? The explanation turns out to be simple: we are paying teachers (and faculty) more in real terms and we have hired more of them. It’s hard to get costs to fall when input prices and quantities are both rising and teachers are doing more or less the same job as in 1950.
We are not arguing, however, that teachers are overpaid!
Indeed, it is part of our theory that teachers are earning a normal wage for their level of skill and education. The evidence that teachers earn substantially above-market wages is slim. Teachers’ unions in public schools, for example, cannot explain decade-by-decade increases in teacher compensation. In fact, most estimates find that teachers’ unions raise the wage level by only approximately 5 percent. In other words, teachers’ unions can explain why teachers earn 5 percent more than similar workers in the private sector, but unions cannot explain why teachers’ wages increase over time.
If the case for unions as a cause of rising teacher compensation in public schools is weak, it is nonexistent for increased compensation for college faculty, for whom wage bargaining is done worker by worker with essentially no collective bargaining whatsoever.
A signal to where we are heading is this:
If increasing labor costs explain the increasing price of education but teachers are not overpaid relative to similar workers in other industries, then increasing labor costs must lead to higher prices in the education industry more than in other industries.
Read the whole thing. Next up, health care.
Addendum: Other posts in this series.
Why have some prices increased since 1950 by a factor of four while other prices have decreased by a factor of four? Technology is making so many goods and services much cheaper than in the past–that seems to be the normal situation–so why do some industries seem not only to be not progressing but actually retrogessing? As Scott Alexander put it, why are some industries so weird?
Those are the questions that motivated my latest piece, a short book with Eric Helland just released by the Mercatus Center titled, Why are the Prices so D*mn High?
In approaching this question I had some ideas in mind. I assumed that regulation, bloat and bureaucracy, monopoly power and the Baumol effect would each explain some of what is going on. After looking at this in depth, however, my conclusion is that it’s almost all Baumol effect. That conclusion radically changes one’s evaluation of price increases and decreases over the long run and it changes what, if anything, one might try to do to address such price changes.
Next week I will examine some of the evidence that pushes me towards this verdict. I’ll also take a closer look at the Baumol effect, which is mistakenly called the cost disease.
Let’s note here, however, what we need to explain. For the most part, we don’t see quick, big changes in prices that then level off. That in itself is interesting since policy tends to be discontinuous. We might expect a big regulation, for example, to cause a big increase in prices as industries adjust but then growth should return to normal. Instead, what we see and need to explain is slow, steady rising relative prices that happens over decades. Indeed, in some cases, such as education, prices have been increasing faster than average for more than a century! Puzzle over that over the long weekend. More next week!
Addendum: Other posts in this series.
That is the new book by David Epstein, the author of the excellent The Sports Gene. I sometimes say that generalists are the most specialized people of them all, so specialized they can’t in fact do anything. Except make observations of that nature. Excerpt:
In an impressively insightful image, Tetlock described the very best forecasters as foxes with dragonfly eyes. Dragonfly eyes are composed of tens of thousands of lenses, each with a different perspective, which are then synthesized in the dragonfly’s brain.
I am not sure Epstein figures out what a generalist really is (and how does a generalist differ from a polymath, by the way?), but this book is the best place to start for thinking about the relevant issues.
For a forthcoming Conversations with Tyler, no associated public event. Your counsel and extreme wisdom are appreciated as always.
Here is good coverage from Dylan Matthews, here is one excerpt:
[Chetty’s] Ec 1152 is an introduction to that kind of economics. There’s little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts introduced in classes like Ec 10. There is no textbook, only a set of empirical papers. The material is relatively cutting-edge. Of the 12 papers students are required to read, 11 were released in 2010 or after. Half of the assigned papers were released in 2017 or 2018. Chetty co-authored a third of them.
Why not excerpt the cameo of me?:
…fellow traditionalist Tyler Cowen…told me he’s excited about the class. “I am for experimentation, and more of it in academia, and for that reason I approve,” he writes. “Of course it was not what I do, which is more traditional micro, more theory, less overlap with sociology. If the instructor is great, that is really what matters.”
There is much more at the link. And here is Daniel Simonsen, Norwegian comic.
Very much a fun one, here is the audio and transcript, here is part of the opening summary:
Do we overrate the importance of doctors? What’s the importance of IQ versus EQ in the practice of medicine? What are the prospect for venture capital in biotech? How should medical training be changed? Why does he think the conventional wisdom about a problem tends to be wrong? Would immortality be boring? What would happen if we let parents genetically engineer their kids?
Tyler questions Emanuel on these topics and more, including the smartest thing his parents did while raising him, whether we have right to medical self-defense, healthcare in low- versus high-trust institutions, and much more.
Here is one excerpt:
COWEN: How can we improve medical education?
EMANUEL: Cut it down. Make it shorter.
COWEN: Cut it down? Why does that make it better? Or does it just make it cheaper?
EMANUEL: No, I think it will make it better. So, we have a lot of memorization, a lot of . . . So, let’s go back to the start. The four years of medical school: two years of preclinical in the classroom learning about biochemistry, genetics, anatomy, microbiology; and the two years of clinical time in the hospital, on the wards.
That dates from 1910. We haven’t really updated it much, except in this one way: we’ve cut down the preclinical time because — less of it — and it changes so fast, by the time you learn it in medical school, get out as a doctor, it’s out of date, A; and B, it’s more or less irrelevant to managing most patients…
And then, by the way, in med school, spending your time in a hospital is not the future. The future of American medicine is out of the hospital. So we need more rotations, more experiences for students out of the hospital.
No med school has made that big shift, and those are the shifts that are going to have to happen over the next 15 or so years.
COWEN: Is there a right to medical self-defense that should override FDA bans on drugs and medical devices? I want to try something that’s not approved —
EMANUEL: No. I don’t like that.
COWEN: I’m saying it’s my body. But why don’t you like it?
EMANUEL: No, no, no, no, no, no, no, no, no, Tyler.
COWEN: Now, you’ve written a much-misunderstood article about how hard you would try yourself to live past the age of 75. Would not the suspense of world and national history always keep you wanting a bit more extra time?
So, say I’m 75. I’ve decided I agree with you, but the NBA Finals aren’t over yet. I want to see game seven. I want the Mueller report to come out. Isn’t there always something?
And then, it’s kind of intransitivity of indifference. Every day there’s something, and you just keep on hanging on, even if one accepts your arguments in the abstract. Can you talk me out of that?
EMANUEL: No, no, Tyler, I think you’re exactly right. That’s why people do hang on. It’s because . . . you know, so I talked to my father, who — he says, “Zeke, you’re absolutely right. I’ve become slower, physically slower, mentally slower. My life” . . . what ends up happening is your life cones down, and you begin to overvalue certain small things. Like the NBA Finals. Like what’s in the Mueller report.
We all know, from any cosmic standpoint — even not a cosmic standpoint, just a 2,000-foot standpoint — most of those things are not irrelevant. It’s really cool to know.
You often ask — and this happens to me all the time. I teach undergraduates. Pretty smart undergraduates. Very smart undergraduates. MBA students, nurses, doctors, right? They have no understanding of history. So, whoever finishes in the NBA Finals, in five years, people have forgotten.
Recommended, interesting throughout.
In April, Harvard University’s economics department for the first time led a Personal Finance workshop series for undergraduates. In May, Princeton students attended the university’s inaugural Financial Literacy Day, complete with T-shirts and consultations.
“I do think this is an environment that is very stressful for many students,” said John Y. Campbell, an economics professor at Harvard who taught the workshop. “There are long-term trends like the increase in inequality, rising student debt—they make students very mindful of the challenges they’re going to face.”
Kian Mintz-Woo, a postdoctoral research associate at Princeton who participated in the Financial Literacy Day, said he craves this kind of formalized instruction.
“We’re a generation that’s really shaped by some really poor macroeconomic decisions and it’s harder for us to think that there’s sort of exogenous progress in our lives and our livelihoods,” he said.
The Ivys are part of a growing trend to teach students about money. In the last decade, community colleges, public schools and state universities have started offering personal-finance programs to meet student demand, according to the Financial Security Project at Boston College.
More states are recognizing the importance of financial literacy at the high-school level. Nineteen states now mandate high schools to educate students on basic financial knowledge before they graduate, up from 17 states in 2018 and 13 in 2011, according to the Council for Economic Education.
That is from Julia Carpenter in the WSJ.
I hope your head doesn’t explode, but it seems to me that Harvard and Matt Yglesias are right about the dismissal of Sullivan from his Winthrop House post at Harvard. Matt explains:
Sullivan isn’t a public defender who’s simply taking the clients assigned to him. He’s not even a full-time criminal defense lawyer who just takes whichever clients happen to come through his door. He’s a busy guy who has classes to teach, a dorm to administer, and various other demands on his time. While it’s obviously true that all criminal defendants have a right to an attorney, it’s equally obvious that criminal defendants don’t have a particular right to Ronald Sullivan’s services.
Now, I don’t doubt that Harvard may have acted for what in part are the wrong reasons, namely asymmetric treatment of left-and right wing causes and cases. Still, it seems reasonable to me that Harvard insists that its faculty dorm administrators face a minimum of outside distractions, especially controversial distractions, without having to judge whose fault is the controversy (Sullivan’s fault? Harvard’s fault? the fault of the possibly “snowflaky” students?). Maybe Harvard would have been unfair and inconsistent had another, non-Weinstein defendant been involved, still that does not make Sullivan’s dismissal the wrong decision.
On top of that, having “snowflake” students in the dorm is still a reason to make Sullivan choose either the dorm or the legal case — complainers don’t always have to be correct for their wishes to have some validity. It really is about helping students focus on their studies, and sometimes that might mean removing distractions which distract for maybe not entirely rational reasons. Furthermore, in this case maybe the distraction was rational to some extent (I genuinely do not know on that one as I do not have direct information, Matt thinks yes but in my view leaps to quickly to that conclusion).
Let’s say I hired a TA for my Econ 101 class, and then I learned that TA would be defending Edward Snowden in his or her spare time. Probably I would ask for another TA! And that has nothing to do with my view of Snowden, one way or the other, or whether my students have rational views of Snowden or not (I genuinely do not know if they do).
With the Sullivan/Weinstein episode, it is not difficult to imagine the media becoming “too interested” in Winthrop House and Sullivan’s role, for media-prurient reasons, and to the detriment of student focus. It is not crazy for Harvard to choke this off before it gets started, with no animus required toward Sullivan or any particular defendant.
Note also this from Matt:
At least some of the heat around this topic stems from a measure of confusion among the general public as to what the job of faculty dean amounts to. It sounds like a lofty academic post but actually is closer to being a kind of glorified RA — though even this is arguably an overstatement of the role.
Overall, I don’t think this is the right cause for free speech advocates, opponents of PC in universities, etc. It seems to me like a private institution making an entirely defensible governance decision, on a matter which does quite genuinely fall under its governance purview.
I will be doing a Conversations with Tyler with him, if you need it here is some background information. So what should I ask?
People were outraged in 2014 when Facebook revealed that it had run “psychological experiments” on its users. Yet Facebook changes the way it operates on a daily basis and few complain. Indeed, every change in the way that Facebook operates is an A/B test in which one arm is never run, yet people object to A/B tests but not to either A or B for everyone. Why?
In an important and sad new paper Meyer et al. show in a series of 16 tests that unease with experiments is replicable and general. The authors, for example, ask 679 people in a survey to rate the appropriateness of three interventions designed to reduce hospital infections. The three interventions are:
Badge (A): The director decides that all doctors who perform this procedure will have the standard safety precautions printed on the back of their hospital ID badges.
Poster (B): The director decides that all rooms where this procedure is done will have a poster displaying the standard safety precautions.
- A/B: The director decides to run an experiment by randomly assigning patients to be treated by a doctor wearing the badge or in a room with the poster. After a year, the director will have all patients treated in whichever way turns out to have the highest survival rate.
It’s obvious to me that the A/B test is much better than either A or B and indeed the authors even put their thumb on the scales a bit because the A/B scenario specifically mentions the positive goal of learning. Yet, in multiple samples people consistently rate the A/B scenario as more inappropriate than either A or B (see Figure at right).
Why do people do this? One possibility is that survey respondents have some prejudgment about whether the Badge or Poster is the better approach and so those who think Badge is better rate the A/B test as inappropriate as do those who think Poster is better. To examine this possibility the authors ask about a doctor who prescribes all of his patients Drug A or all of them Drug B or who randomizes for a year between A and B and then chooses. Why anyone would think Drug A is better than Drug B or vice-versa is a mystery but once again the A/B experiment is judged more inappropriate than prescribing Drug A or Drug B to everyone.
Maybe people don’t like the idea that someone is rolling dice to decide on medical treatment. In another experiment the authors describe a situation where some Doctors prescribe Drug A and others prescribe Drug B but which drug a patient receives depends on which doctor is available at the time the patient walks into the clinic. Here no one is rolling dice and the effect is smaller but respondents continue to rate the A/B experiment as more inappropriate.
The lack of implied consent does bother people but only in the explicit A/B experiment and hardly ever in the implicit all A or all B experiments. The authors also show the effect persists in non-medical settings.
One factor which comes out of respondent comments is that the experiment forces people to reckon with the idea that even experts don’t know what the right thing to do is and that confession of ignorance bothers people. (This is also one reason why people may prefer pundits who always “know” the right thing to do even when they manifestly do not).
Surprisingly and depressingly, having a science degree does not solve the problem. In one sad experiment the authors run the test at an American HMO. Earlier surveys had found huge support for the idea that the HMO should engage in “continuous learning” and that “a learning health system is necessary to provide safe, effective, and beneficial patient-centered care”. Yet when push came to shove, exactly the same pattern of accepting A or B but not an A/B test was prevalent.
Unease with experiments appears to be general and deep. Widespread random experiments are a relatively new phenomena and the authors speculate that unease reflects lack of familiarity. But why is widespread use of random experiments new? In an earlier post, I wrote about ideas behind their time, ideas that could have come much earlier but didn’t. Random experiments could have come thousands of years earlier but didn’t. Thus, I think the authors have got the story backward. Random experiments generate unease not because they are new, they are new because they generate unease.
Our reluctance to conduct experiments burdens us with ignorance. Understanding and overcoming experiment-unease is an important area for experimental research. If we can overcome our unease.
We use data from the National Longitudinal Study of Adolescent to Adult Health to investigate the association between having acne in middle to high school and subsequent educational and labor market outcomes. We find that having acne is strongly positively associated with overall grade point average in high school, grades in high school English, history, math, and science, and the completion of a college degree. We also find evidence that acne is associated with higher personal labor market earnings for women. We further explore a possible channel through which acne may affect education and earnings.
That is the new Medium essay by Anna Gát, it is the best attempt I know of to formulate a “new ideology” of sorts, or maybe a new manifesto, but also a post-political one. Here are a few scattered bits:
Let’s imagine the I.I. [Inter-Intellect] as a loose-knit on/offline niche of people with similar mental energy: we seem to have roughly the same companion + kindness + information needs, activity levels and communication preferences…
We seem to prioritize open discussion and collaboration across differences, and establishing projects that can address real-world questions better…
We believe individuals are capable of acting virtuously without external intervention and judging the consequences of their own actions, and that open discussion of our life plans, decisions or progress can inspire others.
“Example over slogans” is the tldr…
Being conscious of this, the I.I. is age-agnostic and instead problem/progress focused.
Here is the audio and transcript, this was one of my favorite Conversations. Here is the CWTeam summary:
Knausgård’s literary freedom paves the way for this conversation with Tyler, which starts with a discussion of mimesis and ends with an explanation of why we live in the world of Munch’s The Scream. Along the way there is much more, including what he learned from reading Ingmar Bergman’s workbooks, the worst thing about living in London, how having children increased his productivity, whether he sees himself in a pietistic tradition, thoughts on Bible stories, angels, Knut Hamsun, Elena Ferrante, the best short story (“Tlön, Uqbar, Orbis Tertius”), the best poet (Paul Celan), the best movie (Scenes from a Marriage), and what his punctual arrival says about his attachment to bourgeois values.
Here is one excerpt:
KNAUSGÅRD: You have this almost archetypical artist putting his art before his children, before his family, before everything. You have also Doris Lessing who did the same — abandoned her children to move to London to write.
I’ve been kind of confronted with that as a writer, and I think everyone does because writing is so time consuming and so demanding. When I got children, I had this idea that writing was a solitary thing. I could go out to small islands in the sea. I could go to lighthouses, live there, try to write in complete . . . be completely solitary and alone. When I got children, that was an obstruction for my writing, I thought.
But it wasn’t. It was the other way around. I’ve never written as much as I have after I got the children, after I started to write at home, after I kind of established writing in the middle of life. It was crawling with life everywhere. And what happened was that writing became less important. It became less precious. It became more ordinary. It became less religious or less sacred.
It became something ordinary, and that was incredibly important for me because that was eventually where I wanted to go — into the ordinary and mundane, even, and try to connect to what was going on in life. Life isn’t sacred. Life isn’t uplifted. It is ordinary and boring and all the things, we know.
COWEN: So many great Norwegian writers — Ibsen, Sigrid Undset, Knut Hamsun — there’s nationalism in their work. Yet today, liberals tend to think of nationalism as an unspeakable evil of sorts. How do we square this with the evolution of Norwegian writing?
And if one thinks of your own career, arguably it’s your extreme popularity in Norway at first that drove your later fame. What’s the connection of your own work to Norwegian nationalism? Are you the first non-nationalist great Norwegian writer? Is that plausible? Or is there some deeper connection?
KNAUSGÅRD: I think so much writing is done out of a feeling of not belonging. If you read Knut Hamsun, he was a Nazi. I mean, he was a full-blooded Nazi. We have to be honest about that.
COWEN: His best book might be his Nazi book, right? He wrote it when he was what, 90?
COWEN: On Overgrown Paths?
COWEN: To me, it’s much more interesting than the novels, which are a kind of artifice that hasn’t aged so well.
COWEN: But you read On Overgrown Paths, you feel like you’re there. It’s about self-deception.
KNAUSGÅRD: It’s true, it’s a wonderful book. But I think Hamsun’s theme, his subject, is rootlessness. In a very rooted society, in a rural society, in a family-orientated society like Norway has been — a small society — he was a very rootless, very urban writer.
He went to America, and he hated America, but he was America. He had that in him. He was there in the late 19th century, and he wrote a book about it, which is a terrible book, but still, he was there, and he had that modernity in him.
He never wrote about his parents. Never wrote about where he came from. All his characters just appear, and then something happens with them, but there’s no past. I found that incredibly intriguing just because he became the Nazi. He became the farmer. He became the one who sang the song about the growth. What do you call it? Markens Grøde.
COWEN: Growth of the Soil.
COWEN: Arnold Weinstein has a book on Nordic culture, and he argues that the sacrifice of the child is a recurring theme. It’s in Kierkegaard’s Fear and Trembling. It’s in a number of Ibsen plays, Bergman movies. Has that influenced you? Or are you a rejection of that? Are you like Edvard Munch, but with children, and that’s the big difference between you and Munch, the painter?
I told you we ask different questions.
KNAUSGÅRD: Yeah, yeah. You just said different. You didn’t say difficult.
Knausgaard showed up for the taping carrying a package of black bread, which he forgot to take with him when leaving. So for the rest of the day, I enjoyed his black bread…
We study how intelligence and personality affect the outcomes of groups, focusing on repeated interactions that provide the opportunity for profitable cooperation. Our experimental method creates two groups of subjects who have different levels of certain traits, such as higher or lower levels of Intelligence, Conscientiousness, and Agreeableness, but who are very similar otherwise. Intelligence has a large and positive long-run effect on cooperative behavior. The effect is strong when at the equilibrium of the repeated game there is a trade-off between short-run gains and long-run losses. Conscientiousness and Agreeableness have a natural, significant but transitory effect on cooperation rates.
That is by Eugenio Proto, Aldo Rustichini, and Andis Sofianos, forthcoming in the JPE. Note that agreeable people do cooperate more at first, but they don’t have the strategic ability and consistency of the higher IQ individuals in these games. Conscientiousness has multiple features, one of which is caution, and that deters cooperation, since the cautious are afraid of being taken advantage of. So, at least in these settings, high IQ really is the better predictor of cooperativeness, especially over longer-term horizons.
Exploiting admission thresholds to the Bologna daycare system, we show using RDD that one additional daycare month at age 0–2 reduces IQ by 0.5% (4.7% of a s.d.) at age8–14 in a relatively affluent population. The magnitude of this negative effect increases with family income. Similar negative impacts are found for personality traits. These findings are consistent with the hypothesis from psychology that children in daycare experience fewer one-to-one interactions with adults, with negative effects in families where such interactions are of higher quality. We embed this hypothesis in a model that lends structure to our RDD.
Here is the forthcoming JPE article by Margherita Fort, Andrea Ichino and Giulio Zanella. And here are various ungated versions. (Do any of you have the links handy for other papers with similar results? They do exist.)
Quick quiz, we should:
a. Subsidize day care heavily
b. Not subsidize day care, or
c. Wait and see until more evidence is in.
Who is passing and failing this quiz? How about you?