After spending a weekend with 11,000 economists at the American Economics Association 2015 meeting, here’s my perception of the Big Picture…
The two most important questions on which economists disagree are the following:
- Can higher education make a person more productive at his or her ultimate job?
- How much of a society’s resources should be put into reducing CO2 emissions?
Why is the economic value of higher education so important to establish? An assumption driving much of the debate regarding inequality is that a worker with a college degree is more productive and therefore will, in a properly functioning market economy, receive a higher wage than a worker without a college degree. Those who propose radical action to address inequality note that an increasing prevalence of college degree holders has not resulted in an increase in inequality. From this they infer that capital is stealing from labor, specifically by not paying workers for the increase in their marginal productivity as predicted by Econ 101. A possibility that the Big Thinkers don’t seem to consider is “Maybe colleges aren’t teaching anything of value to employers?”
This blind spot is curious because there is a fair amount of evidence that many American college graduates learned little during their four-year sojourn. The book Academically Adrift, for example, cites data from a Collegiate Learning Assessment test showing that many students don’t improve much from freshman to senior year. Studies on students who were admitted to elite schools, such as Harvard, but elected not to attend have found that there was little difference in lifetime income attributable to actually attending the elite schools (though being qualified for admission had a lot of value). There were some interesting additions to this literature at the conference.
Despite the evidence that people who weren’t academically inclined prior to college get little benefit from college and simultaneously suffer four years of lost income, Big Thinker-driven public policy has resulted in a trough being filled with federal tax dollars and a large group of non-selective colleges feeding from that trough. For-profit online schools, such as University of Phoenix, have been particularly aggressive feeders, with roughly 75 percent of their revenue coming from this federal source. “An Experimental Study of the Value of Postsecondary Credentials in the Labor Market” (Deming et al) sent out 10,492 fake resumes to employers on an “online job board” (presumably monster.com) and found that, for jobs that did not explicitly require a college degree, there was little increase in the chance of being contacted by virtue of having a college degree. In other words, the public and private investment in college might well be worthless for these entry-level positions. For jobs that did require a degree, an online degree was about 22 percent less attractive to employers than a “non-selective” bricks and mortar school, e.g., Cal State. For jobs that required a license that itself entails an exam, such as practical nurse or pharmacy technician, employers didn’t seem to care about anything other than whether or not the applicant was licensed. (This suggests that if colleges stopped grading their own students, as proposed in my “Universities and Economic Growth” article, and every college graduate took a comprehensive exam, employers might see a lot of value in those graduates who had scored well on a neutrally graded exam.) An author of the paper summarized by noting that the lowest level of employer interest was in resumes of graduates of the most rapidly growing and most expensive sector of higher education.
Academic attitudes toward business were on display in this session. Karl Marx had sympathy for the employer, constantly at risk from competition and incorrect estimates of demand. Today’s economists have mostly rejected Marx and apparently have abandoned this sympathy. Nobody raised any questions about whether it was ethical to waste employers’ time with 10,000+ fake resumes. When the authors presented their conclusion that there was no difference in employer interest correlated with sex or race, the audience was flummoxed. As racism and sexism were assumed to be high priorities for America’s employers, how to account for this result? Nobody was willing to ask “Could it be that these employers just want to make money and don’t care whether they make money with black male workers, white female workers, or any combination?”
Justine Hastings, of Brown University, presented “Earnings, Incentives and Student Loan Design: The Case of Chile.” It seems that Chile did what the U.S. did, i.e., offered a lot of student loans for higher education. Their program was more intelligently designed, however, in that they didn’t allow universities to raise tuition in response to this new source of funds. Schools ended up with more students, but not more money per student as has been prevalent in the U.S. Nonetheless, the default rate has been high, especially for graduates of non-selective schools and especially for those who majored in humanities and arts. Unlike Americans, Chileans don’t like to keep flushing cash down the toilet, so now they are experimenting with adjusting the maximum loan amount according to the expected return to getting a particular degree (in Chile you don’t apply to “University of Santiago” you apply for a specific major). It turns out that when students see that the government won’t lend them the maximum for a particular degree program they get the message and try to switch into a degree that will result in higher post-graduate earnings. This is especially true for “low SES” students. SES? Due to the rejection of Marx, mainstream economists apparently can’t talk about class so they refer to “Socioeconomic status“. Hastings has a separate paper “The Labor Market Returns to Colleges and Majors: Evidence from Chile” with the discouraging result that attending a lower quality college and majoring in poetry will not set the country’s employers on fire and, in fact, many people would have higher lifetime earnings if they refrained from attending college.
Amanda Pallais of Harvard presented “Leveling Up: Early Results from a Randomized Evaluation of Post-Secondary Aid”, a paper on the Susan Thompson Buffett Foundation scholarship for lower income Nebraskans who have a high-school GPA of at least 2.5 and maintain a college GPA of at least 2.0. It turns out that people who are going to attend college and graduate will do so even without this grant and people who were marginally attached to academic will become only slightly more attached. The cost of keeping one student in college for an additional semester is $40,000 of foundation funds.
Gregory Clark, in my opinion the best of the Big Thinker economists out there, pointed out that when looking at the cost and benefit of programs to get more people into college, the correct approach is to focus on that last person who, without the program, would not have attended college but with the program will. If the objective of the program is to spur economic growth or reduce inequality, the question must be “How much more attractive will that person on the margin be to employers once graduated? (And how likely is that person on the margin to graduate.)”
Economists generally seem to divide into two camps on the question of mass higher education. Some economists believe that good college students are born, not made. If you weren’t born with a talent for math and studying college can’t help you. Others believe that you can send almost anyone to college and they’ll come out with more “human capital” that employers will pay for. My personal view is that traditional American K-12 and college are reasonable matches for some people, e.g., those who love to sit still and do what a teacher tells them to do. The remainder, however, should not be regarded as discards. They could probably learn the same material if it were presented in a different way. (This view is partly informed by research finding that lectures are extremely ineffective for student learning and they are the cornerstone of K-12 and universities, partly by my experience teaching lab courses and seeing how quickly all kinds of people can learn to program, and partly by experience as a flight instructor where I have had no difficulty teaching qualitative physics to people from all walks of life.)
To sum up, the question of education is critical to the question of whether we should consider the kinds of drastic changes to tax policy that are proposed by Piketty and followers. If K-12 and college are making ever-better American workers then capitalists are using their class power to steal from the working class (potential exception: globalization has made a lot more workers available, thus reducing the market-clearing wage). If on the other hand we are to believe the test scores, the problem is simply that engineers keep designing better machines (capital) while our education system turns out workers no better than those of 30 years ago (but at a vastly higher cost in dollars and time).
Turning our attention to the question of climate change… Energy expenditures are about 8 percent of U.S. GDP. (Compare to 8.4 percent for finance (WSJ), which means that we pay as much to banks than to run our cars, heat and cool our houses, smelt aluminum, and spin our hard drives!) If we do something big in energy it will mean cutting back in other areas, e.g., shoveling out money to universities.
The talk that I was most drawn to was by Juliet Schor, a Boston-based economist who has addressed the question of “Why do Americans work so many hours?” in popular books, starting with The Overworked American: The Unexpected Decline of Leisure (1993). She noted that the 1990 standard of living was roughly double that of 1950. Why wouldn’t Americans all work half-time instead of enslaving themselves to buy more stuff? amazon.com hadn’t even launched at the time!) Schor’s work starts from the presumptions that there are declining marginal happiness returns to earning more while extra leisure time makes people happier. She also implicitly relies on my theory that buying expensive organic locally produced food accelerates environmental damage (due to higher spending). Now that the planet is melting, says Schor, what better time to consider a coordinated reduction in hours so that our economy stops growing and therefore our contribution to global warming is reduced. We’ll all be happier. [sidenote: From Schor’s talk, I learned that Maslow’s hierarchy of needs, a required subject for FAA certificated flight instructors, has been discredited by academics.] Schor proposed a $1.2 trillion annual carbon tax on American industry to be distributed per capita to the American people. This would, she noted, have a salutatory effect on income inequality as well.
For each paper there was supposed to be a “discussant” that provided a critique. Schor, however, got a cheerleader in the form of Frank Ackerman, who teaches in the MIT Department of Urban Studies. He said that it is obvious that we need an immediate massive carbon tax and said that there is a 6:1 ratio in per capita carbon emissions among U.S. states (California: good; Texas: bad; this government chart shows that, excluding a couple of barely populated outliers, states actually fall into a pretty narrow range and nearly all of the variation is due to industry, not consumers). Germany overall emits only half the carbon per capita that we do, according to Ackerman. Why haven’t Americans taken drastic action? Ackerman says that it is because a majority of Americans are (1) stupid (anti-science/Tea Party), (2) racist (oppose CO2 action because action is supposed by Barack Obama, whom they identify as black), (3) stupid (because they see an opinion advertisement from Exxon and don’t recognize the likely bias).
I asked “Do these people you posit all have to be stupid and racist? Isn’t it possible that Americans are simply selfish and like their SUVs, McMansions, etc.? Or that they recognize that this is going to be a big government project and they are skeptical because a lot of other government efforts over the last 50 years didn’t work out as planned/hoped? Or that they are skeptical of science because they remember being told that margarine was the key to heart health while now it is considered poison? Or that they simply prefer to put more effort into this problem after technology is more advanced?” Ackerman responded “I’ve said all that I’m going to say on that subject.”
Ackerman’s point of view that economists were infallible and their suggestions should be adopted uncritically by voters was called into question by the fact that the group neglected to book the most popular speakers, such as Thomas Piketty, into sufficiently large rooms and, though they were videotaping the talks, did not have any provision to show the videos in real-time on screens in lobbies or other rooms. If the nation’s top economists can’t estimate demand for talks by economists can we trust them to tell us what to do about global warming?
Ackerman’s point of view that it is obvious what to do was called into question by the diversity of papers at the conference. Adapting to increased atmospheric CO2 may turn out to be much cheaper than reducing atmospheric CO2, depending on which paper you read (see “Climate Change Impacts on United States Agriculture: Accounting for the Option Value of Farmland in the Hedonic Approach” by Ortiz-Bobea, for example: “New results suggest no damages – and possibly benefits- of climate change on the sector, which is in contrast to large damages found in other studies.”). Taking a ton of CO2 out of the atmosphere might be a lot cheaper 15 years from now compared to today (one of my favorite books is The Path Between the Seas, about the construction of the Panama Canal; the late 19th century project failed while the early 20th century project succeeded mostly due to improved steam shovels and an understanding of the role of mosquitoes as disease vectors). As a technologist I love the idea of new energy technology (see my 2008 posting on converting all U.S. cars to electric), but do I have a rational financial basis for this love? And if someone disagrees with me, do I get to call them a racist because there is a black politician who likes the same technology that I like?
The idea that we should put our faith in the U.S. Government is not supported by the papers at the conference. “An Imperfect Storm: How FEMA, Private Hurricane Insurers, and Climate Change Can Create Inefficient Coastal Housing Markets and Impose a Burden on Inland Taxpayers” (Conte and Kelly) shows that subsidized flood insurance “increases coastal development, which when combined with climate change and slow learning, creates a multiplicative effect which ‘fattens the tail’ of the hurricane damage distribution.” Taxpayer-subsidized crop insurance, similarly, discourages adaptation.
There may be a market opportunity for an economist to write a big Piketty-style book on climate change. Even if one were to assume no uncertainty regarding future temperatures on our planet as a function of CO2 emissions there is a huge amount of inquiry to be done on the best course of action for the world as a whole and for each country in particular. The range of estimates of the cost of each additional ton of CO2 spewed into the atmosphere seems currently to be between about $10 and $900. There is no agreement on what discount rate to use to model the value of an improved economy or environment 50 or 100 years from now. There does not seem to be any convincing analysis of how the cost of pulling a ton of CO2 out of the atmosphere (or refraining from putting one in) is likely to vary over time. Tightening up these numbers in a convincing way would be a great achievement. Finally, incentives and games are often studied by economists. The book needs to explain how to ensure that countries won’t cheat on carbon emissions.