Results for “education”

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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.

In normal times and places house prices are kept fairly close to construction costs by the ordinary processes of supply and demand. Average house prices didn’t rise much over the entire 20th century, for example. Even today, house prices are kept close to construction costs in most of the United States. But extreme supply restrictions in a small number of important places (San Francisco, San Jose, LA, New York, Boston etc.), have driven average prices well above any seen in the entire 20th century.

Over the last several decades high productivity industries have become more geographically concentrated. As a result, a substantial share of the productivity gains from technology, bio-tech and finance have gone not to producers but to non-productive landowners. High returns to land have meant lower returns to other factors of production.

The return to education, for example, has increased in the United States but it’s less well appreciated that in order to earn high wages college educated workers must increasingly live in expensive cities. One consequence is that the net college wage premium is not as large as it appears and inequality has been over-estimated. Remarkably Enrico Moretti (2013) estimates that 25% of the increase in the college wage premium between 1980 and 2000 was absorbed by higher housing costs. Moreover, since the big increases in housing costs have come after 2000, it’s very likely that an even larger share of the college wage premium today is being eaten by housing. High housing costs don’t simply redistribute wealth from workers to landowners. High housing costs reduce the return to education reducing the incentive to invest in education. Thus higher housing costs have reduced human capital and the number of skilled workers with potentially significant effects on growth.

Housing is eating the world.

In my post, The Education Tax Reduces Inequality and the Incentive to Work, I illustrated how the high cost of college combined with income based pricing have turned education pricing into a tax with potentially significant effects on work and savings incentives. David Henderson pointed me to a paper by Martin Feldstein in 1992, College Scholarship Rules and Private Saving which states the issues very well.

This paper examines the effect of existing college scholarship rules on the incentive to save. The analysis shows that families that are eligible for college scholarships face “education tax rates” on capital income of between 22 percent and 47 percent in addition to regular slate and federal income taxes. The scholarship rules also impose an annual tax on previously accumulated assets. Through the combination of the implied tax on capital income and the associated tax on previously accumulated assets, the scholarship rules that apply to a middle-income family reduce the value of an extra dollar of accumulated assets by 30 cents in four years. A similar family with two children who attend college in succession will see an initial dollar of assets reduced to 50 cents. Such capital levies of 30 to 50 percent are a strong incentive not to save for college expenses but to rely instead on financial assistance and even on regular market borrowing, Moreover, since any funds saved for retirement are also subject to these education capital levies. the scholarship rules discourage retirement saving as well as saving for education. The empirical analysis developed here, based on the 1986 Survey of Consumer Finances, implies that these incentives do have a powerful effect on the actual accumulation of financial assets. More specifically, the estimated parameter values imply that the scholarship rules induce a typical household with a head aged 45 years old, with two precollege children, and with income of $40,000 a year to reduce accumulated financial assets by $23,124 approximately 50 percent of what would have been accumulated without the adverse effect of the scholarship rules.

Dick and Edlin made a similar point in 1997 but, as far as I can tell, there have been only a handful of papers on this issue since that time. The cost of college, however, is about twice as high today as in the 1980s and price discrimination is much more extensive so the effects are likely larger today.

At the NYTimes David Leonhardt breaks families down into six income classes from the poor to the very affluent, defined as follows:

Using a tuition calculator he then estimates tuition (including room and board) by income class at 32 colleges and universities (see below–the darker dots indicate the richer income classes). At many private colleges and universities it is not unusual for some students to be paying $70,000 per year while others pay less than $5,000, for exactly the same education. (Tyler and I provide some similar data on college price discrimination in Modern Principles.) Leonhardt’s point is that a poor student can afford an expensive education and might actually save money by going to an elite private university rather than to a state college.

Price discrimination in education has two other, less recognized, consequences. It reduces income inequality and it reduces the incentive to work. If every firm charged twice as much to someone who earned twice as much, there would no consumption inequality despite high measured income inequality. The rich don’t pay more than the poor when they buy the same basket of goods at the grocery store but they do pay much more for the same education.The Affluent pay approximately $70 thousand for education at the colleges Leonhardt examines while the Upper-Middle pay about half that. The effect on inequality is significant for families with kids in college. An Affluent person is 52% richer than an Upper-Middle income person (186/122=1.52) but an Affluent person with a kid in college is only 33% richer than an Upper-Middle income person with a kid in college (((186-70)/(122-35)=1.33). Shockingly, an Affluent person with two kids in college is actually poorer than an Upper-Middle income person with two kids in college! ((186-140)/(122-70)=0.88.

Under income-based pricing the education tax becomes an income tax with all the negative aspects of income taxes on behavior such as diminished work incentives. Let’s take a closer look at an Upper-Middle income parent earning $122 thousand per year. If this parent gets a promotion or takes on extra work that bumps their salary by $64 thousand, they move from being Upper-Middle income to Affluent. At least on paper. At an income of $122 thousand the parent will be paying approximately $35 thousand to send their child to college but at $186 thousand they will have to pay $70 thousand for the same college so the increase in salary of $64 thousand is an effective increase of only $29 thousand. If the Upper-Middle income parent has two children in college, earning more money actually results in a net loss. For an Upper-Middle income family with two kids spaced in age a few years apart the education tax could be a very severe work disincentive for up to a decade.

The education tax is a peculiar tax as it is often paid to private organizations rather than to the government but it is still a tax and for those of Upper-Middle income the education tax is a very significant tax.

The consequences of the education tax on inequality and work incentives are neither well studied nor well understood.

Bryan Caplan is on fire in this excellent podcast with Robert Wiblin of 80,000 hours:

Bryan Caplan: In the U.S. I’ve heard so many times – I learned Latin and it really improved my score on the SAT because of all the Latin roots of the English vocabulary words. How about you learn some English vocabulary words, wouldn’t that be a little easier?

Robert Wiblin: I’m just… I’m pulling out my hair here.

Bryan Caplan: Well if you wanna pull out your hair a little bit more. Out of all my ultra moderate reforms that I suggested, the one that I stand behind more strongly than any other is abolishing foreign language requirements in the United States. Because there, we’ve got a bunch of facts, which are: hardly any jobs use foreign languages, it takes a lot of time to get any good. And furthermore, in this book I’m able to go and snap together a bunch of pieces of data to show that virtually zero Americans claim to… even claim to speak a foreign language very well in school.

So I say, look, even if it did have these big payoffs, the system is just a waste of time, and people spend years doing it for nothing. And even here, I just run against a brick wall and people say, well in that case we should just improve the teaching of the foreign language.

Well, how about you do that and then get back to me, but continuing to fund the thing that we have, this is garbage!

And again, Washington state from what I understand, now allows kids to use a computer language in place of foreign language. Like, why not do that? Then it’s like, “No, no we need to do both.” People don’t have an unlimited amount of time, and shouldn’t teenagers be able to have a frigging childhood! Like how much of their childhood do you want to destroy with jumping through these stupid hoops?

As someone who was educated in Canada I can attest to the waste of much foreign language instruction. I had at least 6 years of instruction in French but my French today is perhaps on par with two or three days worth of Berlitz and that mostly because I’ve been to France a few times. For reasons of national unity and ideology, almost all Canadians have years of French instruction but most of the little of what is learned is quickly forgotten. Looking at bilingual cereal boxes is not enough to maintain skill. If you are French in Quebec there are good reasons to learn English but outside of Quebec there are few reasons to learn French. As a result, the large majority of bilingual speakers are native French speakers (plus a few budding politicians). Indeed, among the Canadians who speak English there could well be more Hindi or Chinese bilinguists than French bilinguists.

Don’t make the mistake of arguing that knowing a second language has many benefits. The point is that foreign language instruction in schools doesn’t teach a second language.

Addendum: And don’t forget this.