Category: Uncategorized

Steve Postrel on marginalism and the paradox of higher education

by  Tyler Cowen in

Via Reihan, this is an excellent blog post.  Rather than excerpt, let me reproduce the whole thing:

By now, you may be getting sick of reading articles and blog posts about the crisis in higher education. This post is different. It proposes an explanation of why students have been willing to pay more and more for undergraduate and professional degrees at the same time that these degrees are becoming both less scarce and more dumbed down. And that explanation rests on a simple and plausible economic hypothesis.

First, let me dispose of the idea that “college (and business school) is all about signaling.” The explanation I present allows signaling to represent a major part of the value of higher education, but it says that the historical increase in willingness to pay for education is not caused by an increase in its signaling value. (And the evidence for signaling or screening education premia, as opposed to human capital accumulation, is pretty thin anyway.) I’m certain signaling plays a role in creating value for certain degrees from certain institutions for certain people in certain situations. That it dominates the value proposition for college seems like a stretch.

My hypothesis is that it is precisely the dumbing down of U.S. education over the last decades that explains the increase in willingness to pay for education. The mechanism is diminishing marginal returns to education.

Typical graduate business school education has indeed become less rigorous over time, as has typical college education. But typical high school education has declined in quality just as much. As a result, the human capital difference between a college and high-school graduate has increased, because the first increments of education are more valuable on the job market than the later ones. It used to be that everybody could read and understand something like Orwell’s Animal Farm, but the typical college graduates could also understand Milton or Spencer. Now, nobody grasps Milton but only the college grads can process Animal Farm, and for employers the See Spot Run–>Animal Farm jump is more valuable than the Animal Farm–>Milton jump.

So the value of a college education has increased even as its rigor has declined, because willingness to pay for quality is really willingness to pay for incremental quality. This principle holds true in many markets. For example, a roof with mean time to failure of 5 years is a lot more valuable than one with a MTF of 2 years, but a 25-year MTF isn’t that much better than a 22-year MTF for most owners. A fuel economy increase from 12 to 15 miles per gallon is a bigger deal than an increase from 27 to 30 MPG.

Empirical points in favor of this diminishing marginal returns/reduced overall rigor hypothesis:

1. Rigor appears to be declining over time at all levels of American education.

2. Rate of return evidence classically suggests that the big marginal gains to education come from lower levels of education.

3. The median wages of college graduates have been flat, but the median wages of high-school-only graduates have gone down even more.

4. The MBA market has continued to support higher tuitions and enrollment despite the secular trend in rigor.

5. Employers increasingly favor those with more education even as they complain more about the quality of the graduates they hire.

Additional implications:

1. The incremental human capital gained from attending a (truly) better school rather than a typical school is increasing, since the additional learning is more basic (and hence more valuable) than it used to be.

2. Five and six-year undergraduate-to-masters programs should grow to accommodate those who would benefit from additional human capital.

3. More-rigorous high schools will attract larger premia (in either tuition, ability to be selective, or, for public schools, their impact on local property values), because at lower overall levels of rigor the increment of human capital is worth more.

Extensions of the logic to signaling considerations:

1. If you accept that the marginal ability and effort necessary to acquire education increases in the level of education (the flip side of the assumption about diminishing marginal payoff), then the signaling value of the typical degree is actually declining. The innate ability difference between the college and high-school-only graduate shrinks as both curricula are made less rigorous.

2. Signaling by the quality of the institution attended and the difficulty of the major subject studied is becoming more important; a very selective (or hard to complete) school or major adds back some of the lost signaling power of the typical degree.

3. We should see college degrees becoming more important in occupations that wouldn’t seem to “require” them under the old model of college, such as service staff in food service and hospitality jobs.

Markets in everything

by  Tyler Cowen

After nearly ten years of doing this series, I still find novel and (to me) startling entries, hat tip to @SciencePunk.  Excerpt:

P4304 Sigma Pseudo™ Corpse Scent Formulation I Canine training aids for the detection of corpses.
For early detection, or below 0 °C
P3929 Sigma Pseudo™ Corpse Scent Formulation II Canine training aids for the detection of corpses.
For post-putrification detection
PSCI Sigma Pseudo™ Corpse Scent Corpse Scent Kit Canine training aids for the detection of corpses.
P7184 Sigma Pseudo™ Corpse Scent drowned victim scent A valuable training aid for water search. It provides a reliable scent source for 30 to 45 minutes, in still or running water, at depths of 1-12 feet.
Canine training aids for the detection of corpses.

What kind of mandate should “the right” have supported?

by  Tyler Cowen in

The conservatives and libertarians who earlier supported a mandate, ideally, should have been looking for the following qualities in a health care policy:

1. A very small number (one?) of categories for health care coverage and also reimbursement rates.  Mandates for everyone, in other words.  No Medicare, no Medicaid, no separate set of people in an employer-based, tax-subsidized health insurance sector, rather a unified system.  Switzerland comes relatively close to this, and of course some commentators hope ACA will evolve into this (“means-tested vouchers”), though I suspect the scope of the mandate and the cost of the subsidies will prevent this.

2. A rejection of health care egalitarianism, namely a recognition that the wealthy will purchase more and better health care than the poor.  Trying to equalize health care consumption hurts the poor, since most feasible policies to do this take away cash from the poor, either directly or through the operation of tax incidence.  We need to accept the principle that sometimes poor people will die just because they are poor.  Some of you don’t like the sound of that, but we already let the wealthy enjoy all sorts of other goods — most importantly status — which lengthen their lives and which the poor enjoy to a much lesser degree.  We shouldn’t screw up our health care institutions by being determined to fight inegalitarian principles for one very select set of factors which determine health care outcomes.

3. A modest bundle of guaranteed coverage and services.  I am very influenced by David Braybrooke’s book on meeting basic needs.  Yet for me basic needs truly are basic and do not involve cable TV or small probability chances of delaying death from prostate cancer.

4. Price transparency (mandated if need be) and real competition in the health care sector, including freer immigration for doctors, nurses, and other caregivers, and relaxation of medical licensing and encouragement of retail medical clinics, a’la WalMart style.  This helps keep the cost of the mandate to reasonable levels.  Most cost-saving innovation should come through markets.  The man strapped to a gurney, bleeding, while negotiating a price with his doctor is the exception in this sector, not the rule.  In any case the insurance companies can prearrange the price for that one.

5. If you wish to move away from the strictly conservative direction, you could consider price controls on some areas of medicine.  Singapore does them.

6. Always convert dollars of benefits, usually a private good, into dollars of support for medical research and development, a public good.  You will never end up at a margin where this is a bad trade.

7. Society should firmly believe that it is the duty of the government, first and foremost, to protect us against foreign enemies, environmental catastrophes, pandemics, and other existential threats.  History shows that such existential threats are real.  Alleviating individual sufferings through governmental charity can be a useful source of mutual advantage but it should be subordinate to these broader goals.  Furthermore we should be determined to resist the creation of a large class of perpetual beneficiaries who will strangle the government fiscally and pull it away from these more basic duties.

I would think that such a mandate would be a serious policy option, though maybe not a first best choice.  (There are also mixes of single payer backstops and HSAs, as in Singapore, and a variety of provincial systems.)   Yet that is far from the ACA.  We should not “blame” Obama for that difference (it’s not clear what his more utopian preferences might be, though it is clear he could not have passed them), but still it seems to me that observers can support some version of an individual mandate and oppose ACA.

I agree, by the way, with Ezra Klein’s analysis of the “motivated reasoning” of many particular individuals when confronted with ACA a few years ago.  You can think of this post as an “ideal type” analysis which may or may not apply to many actual people.

Is lack of trust a fundamental macro problem?

by  Tyler Cowen

Ezra responds to my column of Sunday with this post.  Excerpt:

…Tyler Cowen attributes the decline in public-sector employment to “a collapse of trust in politics.” In fact, he says, “the reason that we aren’t getting more expansionary macro policy is fundamental: a lack of trust.”

I don’t buy it. I think the reason we aren’t getting more expansionary macro policy is a polarized political system oriented toward gridlock.

If there’s been a decline in trust toward state and local governments, it’s hard to find it in the polling. State and local governments rank as highly trusted. In a March 2011 poll — so, the period when state and local cutbacks were at their worst — Gallup found that most Americans thought state and local governments had “about the right” amount of power. Only 34 percent wanted state governments to have less power, and only 22 percent wanted local governments to have less power. They outpolled banks, corporations, the federal government and the courts. Local government outpolled churches.

I view political polarization as another manifestation of lack of trust.  For instance the core voters behind the two major parties do not trust each other in power.  In addition Republicans, many independents, and also many Democrats do not trust that tax hikes or rising deficits actually will be used to provide useful public services.  (Ezra himself has stressed in the past how far to the right the Democrats have moved on taxes.)  They still like their local school teachers, but they also do not trust “Federal-state/local coordinated fiscal stimulus.”  Obama stopped boasting about the first round of stimulus some time ago, correctly or not.

I would add that gridlock is endogenous; for instance the Democrats, when they possibly had a chance, did not make hard moves to try to abolish the filibuster and these days they are not keen to present and vote on federal budgets.  Politicians do not have enough trust that voters will reward them for being courageous, if that is the right word, and voters do not have enough trust that the political act is in fact one of courage.  Yet I doubt if we’ll see gridlock on the Medicare doc fix or the AMT patch, as most people still trust direct cash or in kind benefits to themselves.

On another of Ezra’s points, I don’t think trust has fallen because voters are not getting what they want, but rather because the economy has turned down and they feel less wealthy and face higher risk.  (Not getting what you want is more likely to explain trust levels rather than changes.)  Here is plenty of evidence that trust in institutions falls cyclically.  Although the study does not measure trust in local government, the effect appears to be fairly general.

It’s also not electoral gridlock which stops the Fed from doing more.  One major obstacle is simply that voters and many interest groups, rightly or wrongly, view additional inflation as a major vehicle for wealth redistribution and they do not trust that they “will get their money back” through other means.

Addendum: Catherine Rampell adds comment.

Structural theories of unemployment, vindicated as part of the puzzle

by  Tyler Cowen

From the new AER, by Michael Elsby and Matthew Shapiro:

That the employment rate appears to respond to changes in trend growth is an enduring macroeconomic puzzle. This paper shows that, in the presence of a return to experience, a slowdown in productivity growth raises reservation wages, thereby lowering aggregate employment. The paper develops new evidence that shows this mechanism is important for explaining the growth-employment puzzle. The combined effects of changes in aggregate wage growth and returns to experience account for all the increase from 1968 to 2006 in nonemployment among lowskilled men and for approximately half the increase in nonemployment among all men.

You will find many weak structural theories criticized (at length) in the blogosphere, but the stronger versions hold up.  This is very likely one reason why the labor market and output response in recent years has been so weak.  It doesn’t require any stories about companies searching desperately for quality computer programmers, and so showing the generality of unemployment across professions or regions isn’t much of a response to the stronger structural theories.

The Iron Law of Shoes

by  Tyler Cowen

That is what Dan Klein and I used to call it.  Now there is some research, by Omri Gillath, Angela J. Bahns, Fiona Ge, and Christian S. Crandall:

Surprisingly minimal appearance cues lead perceivers to accurately judge others’ personality, status, or politics. We investigated people’s precision in judging characteristics of an unknown person, based solely on the shoes he or she wears most often. Participants provided photographs of their shoes, and during a separate session completed self-report measures. Coders rated the shoes on various dimensions, and these ratings were found to correlate with the owners’ personal characteristics. A new group of participants accurately judged the age, gender, income, and attachment anxiety of shoe owners based solely on the pictures. Shoes can indeed be used to evaluate others, at least in some domains.

The piece is called “Shoes as a Source of First Impressions,” and for the pointer I thank @StreeterRyan.  Via Mark Steckbeck, an ungated copy is here, for the price of your email address.

Is Spain finally going to be for rent?

by  Tyler Cowen

Now, the Popular Party (PP) government of Prime Minister Mariano Rajoy is planning to bring more flexibility to the rental market with a set of measures that make it easier for landlords to get their properties back and for tenants to terminate their lease.

For instance, once the reforms are enacted, owners may demand that a tenant leave the property at any time regardless of the duration of the lease, while tenants will be able to walk out with just one month’s notice. Until now, contracts were for five years by default, and a further three if neither party said anything to the contrary. The executive wants to bring these periods down to three years and one year, respectively.

Here is more, mostly covering the reasons why Spain has overinvested in home ownership.

We are all stagnationists now

by  Tyler Cowen

Here is Jim Hamilton, on peak oil, scary tag at the end:

…we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain. Optimists may expect the next century and a half to look like the last. Benes and coauthors are suggesting that instead we should perhaps expect the next decade to look like the last.

On this issue I am more optimistic than Hamilton.

Alternatively, here is Cardiff Garcia from the FT, with a survey of recent pessimistic thought on productivity, citing (but not necessarily endorsing) Nomura:

…we think it more likely that the economy will grow at a trend pace near 2.5%, which, coupled with normalization in productivity, implies the sustainable underlying pace of monthly gains in private payrolls is in the low-100k range or lower.

Karl Smith has a very useful blog post.  Addressing me, he writes:

My position perhaps more clearly stated is that if all markets were clearing then phenomena such as: lack of educational improvement, globalization, de-industrialization, skew of technological improvement towards information technology, energy shortages, etc would show up in wages.

My view is this.  When real factors are slow, it takes much longer for the private sector to manufacture its own ngdp and also of course rgdp.  (You can pursue a separate argument about how quickly the Fed can fix things, but given that they haven’t, for whatever reason, the previous claim still holds.  We can make multiple margins of comparison, even if a perfect Fed would clear everything up.  We don’t have a perfect Fed.)  Much of North Dakota has full employment, but most of the nation does not.  With a stronger real economy along the right dimensions, we would have more jobs, but we don’t.  The long term where everything shows up in wages can take a while to arrive.  Nothing in this view requires one to tell stories — be they true or not — about companies which cannot find quality computer programmers.  A final point is that labor force participation may be the job market number that really matters.

Here is an excellent post by Will Wilkinson on Obama, Romney, meanness, and Ben Friedman.