Economist's View

"Sources of Lifetime Inequality"

This NBER Working Paper by Mark Huggett, Gustavo Ventura, and Amir Yaron assesses the relative importance luck and initial conditions in explaining inequality, and asks which type of initial condition, human capital, learning ability, or financial wealth best explains later dispersion in individual earnings. The paper finds that 60% or more of the variation across individuals is due to initial conditions rather than shocks that hit agents during their lifetimes (i.e. good or bad luck), and that among the initial conditions, variation in human capital is the most important factor.

As noted in the conclusions, because the evaluation of initial conditions is conducted at age 20, "pushing back the age at which lifetime inequality is evaluated will raise the issue of the importance of one's family more directly than is pursued here. The importance of one's family and one's environment up to age 20 is not modeled in our work..." But however that turns out, an implication of this work is that we need to do all that we can to ensure that disadvantaged children, all children, are able to build up the human capital they will need to be competitive at age 20 and beyond:

Sources of Lifetime Inequality, by Mark Huggett, Gustavo Ventura, and Amir Yaron, NBER WP 13224, July 2007 [open link]:
1 Introduction To what degree is lifetime inequality due to differences across people established early in life as opposed to differences in luck experienced over the lifetime? Among initial conditions, individual differences established early in life, which ones are the most important? A convincing answer to these questions is of fundamental importance. First, and most simply, an answer serves to contrast the potential importance of the myriad policies directed at modifying or at providing insurance for initial conditions (e.g. public education) against those directed at shocks over the lifetime (e.g., unemployment insurance programs). Second, a discussion of lifetime inequality cannot go too far before discussing which type of initial condition is the most critical for determining how one fares in life. Third, a useful framework for answering these questions should also be central in the analysis of a wide range of policies considered in macroeconomics, public finance and labor economics.

A Role for Heterodox Economists

This is my entry in the discussion of Chris Hayes' article on heterodox economists at TPM Cafe. It should appear early tomorrow. There are currently entries from Chris Hayes, Thomas Palley, Tyler Cowen, James Galbraith, Nathan Newman, Max Sawicky, and James Galbraith with a follow-up, and there are others yet to come. [Update: Here's the link to the post at TPM Cafe]

---

Most of the points to be made about Chris Hayes' recent article on heterodox economists and their place  within the economics profession have been made here already, so I am going to take a bit of a different approach and talk about one of the heterodox economists discussed in the essay.

One of the first heterodox economists mentioned  is Michael Perelman:

I strike up a conversation with economist Michael Perelman in the hallway. ... Perelman, who is there for the EPI reception, works at the margins of the discipline; he is one of a few hundred self-described "heterodox" economists at the conference. ... I ask him about how he relates to the so-called mainstream of his profession. "It's a mafia," he says quietly, his eyes roving over to the suits spilling out of the Freedom to Choose room.

I first met Michael in the late 1970s during my undergraduate days at California State University at Chico where he was a faculty member. I never took a class from Michael, and that is part of the story, but I also want to use his example to talk about how heterodox ideas are expressed within economics departments more generally.

Here's what the department website says about him today:

...Michael Perelman, Professor of Economics, is the most prolific author in the Department of Economics at Chico. He enjoys teaching a wide range of courses including [principles of micro and macro], ... Economics of the Future ..., ...U. S. Economic History..., ...Economics of Big Business..., ...History of Economic Thought... and ... Marxist Economic Thought... His classes emphasize critical thinking about the application of economic thought... He likes to publish what is discussed in classes. To date, Professor Perelman has authored fifteen books.

"Although known for his radical views, Professor Perelman is widely respected throughout the campus. Dr. Perelman is a scholar of high productivity--he has a record of scholarly research, writing and presentations that is prodigious. Even more, his level of work has been consistently high since he joined our faculty in Economics in 1971." (Arno J. Rethans, Dean, College of Business)

"The Dead Grandmother/Exam Syndrome"

This is over 15 years old, but with exams approaching, it seems topical and a useful safety warning for the families of students. I became aware of this today through an email about our Macro Group meeting tomorrow:

I have attached Sims' JME paper on rational inattention for tomorrow's meeting. I have also included another paper that moved me deeply and that I think everyone should read.

And here's the paper:

The Dead Grandmother/Exam Syndrome and the Potential Downfall Of American Society, by Mike Adams, Biology Department, Eastern Connecticut State University, The Connecticut Review, 1990: It has long been theorized that the week prior to an exam is an extremely dangerous time for the relatives of college students. Ever since I began my teaching career, I heard vague comments, incomplete references and unfinished remarks, all alluding to the "Dead Grandmother Problem." Few colleagues would ever be explicit in their description of what they knew, but I quickly discovered that anyone who was involved in teaching at the college level would react to any mention of the concept. In my travels I found that a similar phenomenon is known in other countries. In England it is called the "Graveyard Grannies'' problem, in France the "Chere Grand'mere," while in Bulgaria it is inexplicably known as "The Toadstool Waxing Plan" (I may have had some problems here with the translation. Since the revolution this may have changed anyway.) Although the problem may be international in scope it is here in the USA that it reaches its culmination, so it is only fitting that the first warnings emanate here also.

Robert Reich: The Real Scandal of Student Loans

Robert Reich wonders why the government provides loan guarantees and subsidies to banks and other lenders so that they can make profitable student loans when direct provision of the loans by government is cheaper:

The Real Scandal of Student Loans, by Robert Reich: The emerging scandal over student loans – and financial aid administrators that have cozy relationships with lenders – is only the tip of a scandalous iceberg.

Consider: The Federal government subsidizes college loans in two different ways, giving colleges and universities the option of which way to go.

The first way is for the federal government to lend students the money directly. ... The alternative is for the federal government to subsidize student loans indirectly by guaranteeing banks and other private lenders that if a student doesn’t repay the loan, the government will. The government also gives banks and private lenders additional subsidies to ensure they get a profitable return on any student loan they make.

Obviously, this second alternative is a great deal for ... lenders. Hey, a guaranteed return on a no-risk loan! But it’s a lousy deal for American taxpayers. According to a study by the Center for American Progress, taxpayers pay about $7 more for every $100 lent by the private lenders than they do on direct government loans.

That amounts to billions of taxpayer dollars each year ... that could be saved if the direct loan program was the only program. Billions of savings that could be put, for example, into Pell Grants for needy students.

So here’s the multi-billion-dollar question. Why does the federal government continue to provide colleges and universities the option of going with the more expensive program when the government can offer direct loans more cheaply? Why is it that some fifteen years after the direct student loan program was first established, more than three-quarters of student loans still come through the more expensive system?

Let me hazard a guess. Because the banks and other private lenders have enormous political clout in Washington. They also have clout within colleges and universities.

This is the real scandal of student loans, and it’s got to stop. There’s no good reason for the federal government to waste taxpayer money by subsidizing banks and other private lenders when government direct loans are cheaper.

Open University: Where are the Economic Historians?

Eric Rauchway of Open University explains the disappearance of economic historians from history departments:

Where are the Economic Historians?, by Eric Rauchway, Open University: Darrin McMahon asks "about the fortunes of economic history and of the understanding (or not) of economics by historians." As I believe the only economist on the Open U contributor list is Lawrence Summers, whose response to this query may not come quickly, I will offer my 2 cents.

My university, UC Davis, hosts one of the best collections of economic historians in the country: Gregory Clark, Peter Lindert, Alan Olmstead, and Alan M. Taylor. I can say this without immodesty, because not one of them is in my department--the History Department--they're all economists. Nor is this atypical. Off the top of my head--this is not a comprehensive list--I can name sharp scholars of the economics of the Great Depression (Christina Romer, Brad DeLong; Ben Bernanke before he became Fed chair), nineteenth-century globalization (Jeffrey Williamson, Lance Edwin Davis), railroads (Robert Fogel), immigration and internal migration (Claudia Goldin, Joseph P. Ferrie), slavery, emancipation, and reconstruction (Fogel, Goldin, Stanley Engerman, Richard Sutch, Gavin Wright), who all work outside history departments, as indeed do most of the authors who publish in the Journal of Economic History. You can still find economic historians in history departments--Sutch's coauthor Roger L. Ransom; Robin L. Einhorn, William R. Summerhill, Niall Ferguson--but they're no longer so thick on the ground as once they were.

What happened? Partly, technical innovations in economic methods made it difficult for the untrained to understand the new economic history. ...

Economic history might have moved out of history departments for market reasons as well. If, to pursue economic history, you had to master technical skills that would make you eligible for an appointment in an economics department, you would probably prefer that to an appointment in a history department: economists get paid more because they're eligible for employment in government and business as well as universities.

Is this split a Bad Thing? Well, if traditional historians continue to keep abreast of changes in economic history relevant to their work and vice versa, so they can incorporate it into their teaching and scholarship, then it's probably okay.

I wish I could reassure Eric that economic history is alive and well within economics departments generally. I cannot, and that's a loss for our profession. I was fortunate enough to be forced to take both history of economic thought and U.S. economic history during graduate school, and face a core exam if I didn't learn them well enough, but that is no longer the case in most programs. In may cases, the courses are no longer offered at all.

Bill Gates: Open the Doors to More High-Skill Immigration

Bill Gates continues his crusade to allow more high-skilled immigrants into the U.S.:

How to Keep the U.S. Competitive, by Bill Gates, Commentary, Washington Post: ...Innovation is the source of U.S. economic leadership and the foundation for our competitiveness in the global economy. Government investment in research, strong intellectual property laws and efficient capital markets are among the reasons that America has for decades been best at transforming new ideas into successful businesses.

The most important factor is our workforce. Scientists and engineers trained in U.S. universities -- the world's best -- have pioneered key technologies such as the microprocessor, creating industries and generating millions of high-paying jobs.

But our status as the world's center for new ideas cannot be taken for granted. Other governments are waking up to the vital role innovation plays in competitiveness. ...

Two steps are critical. First, we must demand strong schools so that young Americans enter the workforce with the math, science and problem-solving skills they need to succeed in the knowledge economy. We must also make it easier for foreign-born scientists and engineers to work for U.S. companies. ...

Our schools can do better. Last year, I visited High Tech High in San Diego; it's an amazing school where educators have augmented traditional teaching methods with a rigorous, project-centered curriculum. Students there know they're expected to go on to college. This combination is working: 100 percent of High Tech High graduates are accepted into college, and 29 percent major in math or science, compared with the national average of 17 percent.

To remain competitive in the global economy, we must build on the success of such schools...

American competitiveness also requires immigration reforms that reflect the importance of highly skilled foreign-born employees. Demand for specialized technical skills has long exceeded the supply of native-born workers with advanced degrees, and scientists and engineers from other countries fill this gap.

This issue has reached a crisis point. Computer science employment is growing by nearly 100,000 jobs annually. But at the same time studies show that there is a dramatic decline in the number of students graduating with computer science degrees.

The United States provides 65,000 temporary H-1B visas each year to make up this shortfall -- not nearly enough to fill open technical positions.

Permanent residency regulations compound this problem. Temporary employees wait five years or longer for a green card. During that time they can't change jobs, which limits their opportunities to contribute to their employer's success and overall economic growth.

Last year, reform on this issue stalled as Congress struggled to address border security and undocumented immigration. As lawmakers grapple with those important issues once again, I urge them to support changes to the H-1B visa program that allow American businesses to hire foreign-born scientists and engineers when they can't find the homegrown talent they need. This program has strong wage protections for U.S. workers: Like other companies, Microsoft pays H-1B and U.S. employees the same high levels...

Reforming the green card program to make it easier to retain highly skilled professionals is also necessary. These employees are vital to U.S. competitiveness, and we should welcome their contribution to U.S. economic growth.

We should also encourage foreign students to stay here after they graduate. Half of this country's doctoral candidates in computer science come from abroad. It's not in our national interest to educate them here but send them home...

During the past 30 years, U.S. innovation has been the catalyst for the digital information revolution. If the United States is to remain a global economic leader, we must foster an environment that enables a new generation to dream up innovations, regardless of where they were born. Talent in this country is not the problem -- the issue is political will.

On High Tech, the fact that more graduates major in math and science in college than at other schools (29% versus 17%) is not, in and of itself, evidence that these schools work since a high degree of selectivity bias is likely present (those who like math and science are more likely to enroll in a "High Tech High" than other students, the web site says they get 3,000 applications for 300 slots). I agree completely with the message on education, but worry that instead of building upon what works, we are too ready to tear it all down and start over. We have a Gates Foundation small schools initiative here in Eugene that broke an existing high school into three smaller specialty schools (an International High School, a school specializing in Invention, Design, Engineering, Arts, & Science, and North Eugene Academy of Arts). If it works, great, but these are kids lives we are playing with and if it doesn't work and outcomes deteriorate, the price of innovation, the risk, becomes very localized and very steep for those students who participate in the failed experiments (and it's not always voluntary). I wish there was a better way to spread the risk of these experiments across the population rather than localizing it in schools that are already, for the most part, having troubles.

As for immigration, I am generally supportive of open door policies. However, I do want to point out that there is another solution for Gates and others. They believe that there is plenty of talent in the U.S., that's not the problem, it's just that workers lack the training they need. Microsoft could provide the training itself instead of free-riding on the educational system. It takes a little longer and costs more, of course, but consistent with advocates of privatization and efficient markets, it forces Microsoft to internalize the costs of training its workers, particularly specialized training. But I can't blame Microsoft for wanting to avoid these costs if it can, and for wanting to increase the supply of labor as much as possible by opening the borders to more high-skill immigration.

The shortage of U.S. graduates in this area may be because students have no certainty that specialized skills in these areas will retain their value in the future, a consequence of changes in technology that undermine existing skills over time, digital technology that allows collaborative work to be performed outside of the U.S., and the prospect of more temporary visas being issued in the future.

My observation is that there is a large set of talented students who respond strongly to expected employment prospects when they choose a major, though there is, of course, a time-delay between the appearance of shortages and surpluses in particular areas and changes in the number of majors. But the effect is there. If U.S. students perceive that an investment in computer science training relative to investing their time elsewhere will have the largest long-run payoff, any shortage will take care of itself. [And, as noted in comments, access to education may not be equal so that another way to increase supply is to increase educational opportunities within the U.S.]

In the long-run, due to technology and globalization and to comparative advantage, trying to close doors to high-skilled workers is, for the most part, a losing battle. We can create artificial barriers to foreign competition and steer our students in particular directions but there is a danger that in doing so, we set them up for a bigger fall later. If the walls keeping out foreign competition cannot be maintained in a digital age, and if we artificially direct students to particular occupations, once the walls do come down people employed in these areas will be very exposed and in danger of a large fall in income and employment prospects due to the increased competition. For that reason, I think we are better off letting the walls come down now, within reason of course, and allowing prices direct our students to the places they will, so far as markets can predict, be most highly valued in the future.

Update: Dean Baker also comments in Bill Gates Comes to the Coward's Corner. PGL too.

Run, Run, Run Those Regressions Away...

[video source]

An Interview With David Card

David Card is interviewed about a wide variety of topics in his research. Here are bookmarks to specific topics:

• Tax Rates and Labor Supply
• Minimum Wage
• Sticky Wages
• Strike Patterns
• Unions and Inequality
• Skill-Based Technical Change
• Returns to Education
• Voting Machines
• Immigration
• Why Labor Economics?

Interview with David Card, by Douglas Clement, The Region, Minneapolis Fed, December 2006 (Interview: October 17, 2006): David Card seems like a pretty mild-mannered guy. True, he speaks with conviction, but it is confidence backed by meticulous research and tempered with open acknowledgment of the limits of that research. Card, an economist at the University of California, Berkeley, is the antithesis of a zealot.

Nonetheless, by virtue of the topics he investigates, he has frequently found himself in the center of the nation's most incendiary controversies. And in many cases, Card's findings have been at odds with the conventional wisdom. Raising the minimum wage modestly is likely to have a negligible impact on employment levels, he has found.

Immigration has only a minor impact on wages of native-born workers. But it would be wholly inaccurate to say he's been drawn into these debates. In fact, he has scrupulously avoided taking advocacy positions. A public stance, he believes, might raise doubt as to the rigor of his methods and the impartiality of his findings—two qualities he does defend zealously.

In 1995, Card was awarded the John Bates Clark Medal, given every two years to an outstanding American economist under 40 years of age. In granting the award, the American Economic Association highlighted Card's ingenious use of “natural experiments”—naturally occurring instances of the phenomena under study.

To study the impact of minimum wage legislation, for instance, Card looked at fast-food jobs in New Jersey and Pennsylvania. To understand immigration, he examined the 1980 Mariel boat lift, when Miami's labor force increased by 7 percent. In a just-released paper on unemployment benefits and job search behavior, he scrutinized data from Austria, where workers on the job for 36 months or longer get generous severance.

“If one unifying principle runs through David Card's work,” observes Harvard economist Richard Freeman, “it is a belief in the power of empirical economic science—in the ability to use statistics creatively to make inferences about how the economy operates.”

Is There an "Anti-Affirmative Action Wave Washing over America"?

Is America ready for the end of "the affirmative action era"? According to this, the answer is no:

The end of affirmative action?, by Erin Aubry Kaplan, Commentary, LA Times: At least a dozen times in the last decade, I've read or heard that the United States is coming to the end of the affirmative action era. I don't believe it.

Americans are always making premature or wrongheaded pronouncements about the ends and beginnings of eras... The guy making this case most recently is former University of California Regent Ward Connerly. Connerly has made a career out of being the black man who opposes affirmative action no matter what, and after a dozen years, he's satisfied that his work is close to done.

Proposition 209, which banned affirmative action in public education, hiring and contracts, was approved by California voters 10 years ago. Since then, the complexion of the UC student body has paled considerably. Measures modeled after 209 are passing in other parts of the country, including in Michigan earlier this month. On the federal level, the most conservative Supreme Court in modern history looks poised to limit or eliminate the federal mandate that created affirmative action.

Connerly is encouraged by all these good omens. He has said that he feels an "anti-affirmative action wave washing over America" and that he's following that wave to Oregon, Nevada and other states still in need of conversion. Spreading the gospel, apparently.

The gospel of what, exactly? What I find sad about this crusade, apart from the fact that its spiritual leader is a black man, is that it's so hellbent on destroying something meant to help folks but offers nothing helpful to take its place. It's a movement built on people in power gathering up all the marbles (which were mostly theirs to begin with) and going home. The best it can do is preach equality by doing nothing, a kind of free-market approach to solving deep-rooted racial problems. Such an approach only works for those controlling the free market. ...

The most troubling question raised by the potential end of the affirmative action era, however, is what kind of era we can expect next. For 40 years, affirmative action has been a modest political expression of a much bigger vision of America that emphasizes inclusion, and righting past wrongs where feasible, to make our social experiment into something truly great.

If Connerly is right, Americans are now admitting that this is too utopian for their tastes. Now they're ready to launch a new era in which it's perfectly OK to acknowledge that America doesn't really care about a level playing field, if it ever really did. Personally — and theoretically — I fear a future like that.

[For more on Proposition 209 and affirmative action, see Anti-bias law has backfired at Berkeley, by Robert J. Birgeneau, UC Berkeley Chancellor, March 2005.]

Inequality, Education, and Government Policy

Federal Reserve chairman Ben Bernanke says "the most important factor" in rising inequality "is the rising skill premium, the increased return to education." According to this view, widening inequality is justified by differences in productivity. Others, however, believe government policy plays an important role in generating inequality.

In general, those who believe rising inequality is due to a rising skill premium dismiss arguments that government action in areas such as minimum wage legislation, changes in taxes, and anti-union policies are behind changes in equality. On the other side, there are strong arguments against the skill-based technological change argument that inequality is due to market forces rewarding higher productivity.

However, as this editorial shows, even if education based differences in productivity are the source of rising inequality, the underlying cause can still be government policy that has reduced the ability of the disadvantaged to get the education they need:

Shrinking Opportunities, Editorial, Washington Post: Guess which high school graduate is more likely to go to college: the ill-prepared student who is financially well-off or a high-achieving student from a low-income family? According to a new study, they have pretty much the same chance -- and that is an embarrassment to the American educational system.

The sad story of the obstacles low-income and minority students face in enrolling and graduating from college has been documented in two recent reports by the Education Trust. Giving the lie to a perception that there has been progress in widening educational opportunities, the independent research and advocacy organization shows greater disparities between the haves and have-nots than there were 30 years ago. It rightly takes aim at federal, state and college policies and practices. Particularly troubling was the group's finding that the nation's flagship universities, generally the oldest and most prestigious public campuses, are becoming less accessible to low-income and minority students. Or, in the words of Education Trust Director Kati Haycock, America's top public schools are getting "whiter and richer" as high school graduating classes are becoming more diverse.

At the heart of the problem are growing inequities in how financial aid is apportioned. There are fewer state resources, and the stagnant federal policy on student aid has not kept pace with soaring tuition. But the universities also bear responsibility for decisions that divert money from low-income students who can attend college only if they receive financial assistance. In a bid to enhance their prestige by becoming more selective, public universities are using financial aid to compete for high-income students who are able to go to college without assistance.

Consider that the average institutional grant aid in 2003 to students from families earning more than $100,000 a year was higher -- at $3,823 -- than the $3,691 awarded to students with family incomes of less than $20,000. ... An estimated 400,000 students each year aren't able to attend a four-year college because of financial considerations...

Neoclassical Indoctrination

This story is from a reporter who enrolled in an introductory economics course at the University of Chicago to learn about "left-wing indoctrination" in college courses as practiced in economics:

What We Learn When We Learn About Economics, by Christopher Hayes, These Times, November 2006: There’s a case to be made that the single most intellectually and politically influential neighborhood in the United States is Chicago’s Hyde Park. Integrated, affluent and quiet, the 1.6 square mile enclave on the city’s south side is like a tiny company town, where the company happens to be the august, gothic, eminently serious University of Chicago. Students at the U. of C. sell T-shirts that read “Where Fun Goes To Die,” and the same could be said of the neighborhood, which until very recently had a bookstore-to-bar ratio of 5:2.

But the university is probably best known for the school of economic thought it has produced. When the Chicago School first emerged in the ’50s, its zealous support of free markets and critique of government intervention were considered reactionary and extreme. ...

Neoclassical economics, as the Chicago School of thought is now called, has become an international elite consensus, one that provides the foundation for the entire global political economy. In the United States, young members of the middle and upper-middle class first learn its precepts in the academy. Polls routinely show that economists and the general public have widely divergent views on the economy, but among the well-educated that gap is far narrower. A 2001 study ... showed that those with college degrees are more likely to subscribe to the views of neoclassical economists than the general public...

Conservatives have long critiqued academia for the ways professors use their position to indoctrinate students with left-wing ideology, but the left has largely ignored the political impact of the way people learn economics, though its influence is likely far more profound. So in order to find out just what students learn when they learn economics, I headed down to Hyde Park, where the University generously let me enroll in “Principles of Macroeconomics” for a quarter.

The Relative Value of Sports and Academics

John Whitehead at Hypothetical Bias on the relative value of sports and academics in higher education:

Perfect substitutes: At halftime of the ASU-Furman game..., the ASU Chancellor (i.e., President) stated that holding the NCAA I-AA championship football trophy felt just as good as having a Nobel Prize winner on the faculty...

Playing Games with Economics

A video game designed to teach the principles of microeconomics:

Aliens Teach University Economics Class, by Nell Boyce, NPR, All Things Considered: ...[S]tudents taking ECON 201 at the University of North Carolina at Greensboro ... don't even come to class, they just log in to the Internet. The entire microeconomics course is a video game that students play online to earn three college credits.

Watch Sarbonians Crash-Land on Earth and Grapple with Economics of Survival

...The Sarbonian aliens are named after economics professor Jeff Sarbaum. "This is a game in which the students are literally immersed in a story. And they take on the role of a character," he explains. "So all of the reading material, all of the content, all of the examinations and homework, if you will, are built inside the engine of the game."

The Sarbonians come from an alien world that knows no scarcity. After they crash-land on Earth, the students have to grapple with economic challenges like how to make and distribute goods, and how to trade with another group of aliens.

..."I believe we are the first ones to fully emerge students in a narrative story and treat the whole course as a game," Sarbaum says...

In his microeconomics game, a robot acts like a tutor. As the game goes on, the characters talk more and more like economists. ...

To gauge how well students are picking up on the concepts, they take multiple-choice tests as they move through the different levels of the game. ...

"Shocked that Their Leaders Are so Out of Touch"

A "bachelor's degree is no longer a guarantee of raises big enough to beat inflation" even in the presence of strong productivity growth:

Why It Takes a Doctorate To Beat Inflation, by By David Wessel, WSJ: The typical American worker with a four-year college degree earns a lot more money than a similar worker who didn't go beyond high school -- 45% more. Education does pay. But in today's economy, getting a bachelor's degree is no longer a guarantee of raises big enough to beat inflation.

Although the best-paid college grads are doing well, wages of college grads have fallen on average, after adjusting for inflation, in the past five years. The only group that enjoyed rising wages between 2000 ... and 2005 ... were the small slice with graduate degrees.

Think about that: Even though the economy and productivity have been growing smartly, lots of workers who played by the rules and went the distance to get a four-year college degree aren't getting ahead. ... The very best-paid workers are getting the bulk of the raises. ...

Before nitpicking emails arrive: No single set of numbers gives a complete picture. The data in this chart cover only cash wages -- not health benefits or pensions. If they were included, ... inequality wouldn't disappear. The best-paid 20% of workers on private payrolls are three times as likely to have health insurance as those in the bottom 20%, and this tally doesn't count stock options and the like -- and you know who gets the bulk of those.

The question isn't whether the gap between winners and losers in the labor market is widening; it's why. And it's no longer as simple as saying: The more education one gets, the more one earns. Something more complicated is driving up pay at the top. ...

[I]n the middle -- where many four-year college graduates work -- ... imports, overseas outsourcing and technology seem ... to be reducing U.S. employer demand ... significantly, and thus restraining wages. That is the kind of shift in the tectonic plates of the economy that produces political earthquakes.

And it's an earthquake the GOP has largely ignored or denied as it has tried to convince middle class America that the economy has been good for them. Here's Robert Reich:

The People Are Rising, by Robert Reich: A Republican operative told me the other day that if Republicans could only get Americans to focus on the economy instead of Iraq, the GOP could hold on to the House. He's got it completely wrong. A big reason Republican poll numbers are sinking around the country is Americans are focusing on the economy.

The great sucking sound you hear every time Bush or any other Republican says the economy is doing fine is the collective inhalation of tens of millions of Americans, shocked that their leaders are so out of touch. Republican candidates are dropping like dead fruit flies ... everywhere wages and jobs are under sharpest assault -- because Republicans won’t admit what their constituents know: that wages are stuck in the mud, that job security is gone, that pensions are drying up, that health insurance costs are out of control, that housing prices (the only nest eggs left) are leveling out or falling. The only people who are getting much out of this economy are in the top one percent ...

Bush’s father was sent packing in 1992 when he insisted the economy was in fine shape. He sounded looney – as if he lived on another planet. It’s too late to uproot the current Bush but Americans are ready to uproot congressional Republicans who have shown not a jot of what most people are going through.

Worse yet, over the last few years Congressional Republicans gave away the store to big corporations and the rich, and robbed average working people. At the behest of the credit-card industry, they made personal bankruptcy almost impossible, while allowing big companies to declare bankruptcy and rid themselves of pension and health obligations to their workers. At the behest of the oil and gas industry, they gave away billions in subsidies, while oil companies got record profits and most people paid through their noses for gas and home heating oil. At the behest of the drug companies, they created a Medicare drug benefit that prevented Medicare from using its huge bargaining leverage to get lower drug prices for the elderly. At the behest of chain stores and the fast-food industry, they blocked the minimum wage from catching up with inflation. At the behest of corporate America, they got rid of overtime pay for millions of hard-working Americans. At the behest of the richest, they created tax cuts that made the rich even richer, while cutting housing assistance and health care for poor kids.

Here's what Americans are deciding: It’s time to throw the rascals out. The people are rising because they’ve had enough. And when the Democrats take over the House, and perhaps the Senate as well, Democrats must remember they were put there to get the nation back on track – to end this reverse Robin-Hood scourge and to give everyone once again a fair shot at decent work so the economy once again works for everyone.

Professors and God

"Even at elite, doctoral universities, a majority of professors are neither atheistic nor agnostic":

Survey finds belief in God in the halls of academe, The Associated Press: Contrary to stereotype, most college professors are not atheists or agnostics, according to new research. In fact, only about one-quarter of professors deny God exists or claim it is impossible to know, according to survey results analyzed by sociologists Neil Gross of Harvard University and Solon Simmons of George Mason University. The rest say they believe in God at least part of the time, or some kind of higher power.

College professors are less religious than the general population, the authors report. For example, about 40 percent of professors frequently attend religious services, compared to 47 percent for the general population. But the authors say religious commitment levels are higher than previous surveys, which did not include professors at community colleges, who are more religious.

But even at elite, doctoral universities, a majority of professors are neither atheistic nor agnostic, and 20 percent say they have no doubt God exists.

Maybe a professor is God. Perhaps there's this all-powerful, all-knowing scientist out there somewhere, and we along with beings on other planets in the universe are experiments in the equivalent of the scientist's Petri dishes. The scientist sets up a dish, seeds it with creatively designed self-replicating biological processes, then watches to see what happens over time as evolution unfolds in response to the external shocks built into the dynamic system. All day long, twenty-four hours a day every day, the scientist records everything we do in one huge data set, a data set that is bigger and more complete than we can understand (well, maybe this guy gets it). When we die, our data are reviewed at a gateway. The data from the good observations in the dish are retained (their spirits go to heaven) while the unsuccessful experimental outcomes are discarded (they go to hell and burn). Events like great floods are a sterilization of the Petri dish due to the emergence of unstable trajectories (and, before sterilizing you need to retain the best outcomes in each class in an "ark" to use to reseed the next experiment). Thus, we are the outcome of creatively designed and creatively destructed experiments on evolutionary processes.

Or maybe not.

Disappointing News on Income, Poverty, Health Insurance, and the Earnings of College Graduates

Some disappointing news in today's income data from Census. The NY Times sets the table:

Downward Mobility, Editorial, NY Times: If you’re still harboring the notion that the economy is “good,” prepare to be disabused...

On to the news:

Young College Grads in Free Fall, by Michael Mandel, Economics Unbound: Today's income release from Census was filled with all sorts of interesting numbers. Real median household income rose for the first time since 1999. But it turns out that all of the gain came from foreign-born households--immigrants in other words. The income of native households remained "statistically unchanged." That will give both the pro-immigrant and anti-immigrant forces plenty to talk about.

More disturbingly, the numbers show that young college grads face a steadily worsening future of falling wages. The real earnings of workers aged 25-34 with a BA dropped by 3.3% in 2005. All told, the earnings of young college grads are down by almost 8% since 2002.

Isn't this a horrible looking graph?

The Center on Budget and Policy Priorities (CBPP) examines income and poverty statistics:

Poverty Remains Higher, and Median Income for Non-Elderly is Lower, Tthan When Recession Hit Bottom, CBPP: Summary Overall median household income rose modestly in 2005, while the poverty rate remained unchanged.  For the first time on record, poverty was higher in the fourth year of an economic recovery, and median income no better, than when the last recession hit bottom and the recovery began.

In addition, the 1.1 percent increase in median income in 2005, which was well below the average gain for a recovery year, was driven by a rise in income among elderly households. Median income for non-elderly households (those headed by someone under 65) fell again in 2005, declining by ... 0.5 percent.  Median income for non-elderly households was $2,000 (or 3.7 percent) lower in 2005 than in 2001.

In a related development, the median earnings of both male and female full-time workers declined in 2005.  Median earnings for men working full time throughout the year fell for the second straight year, dropping ... 1.8 percent, after adjusting for inflation.  The median earnings of full-time year-round female workers fell for the third straight year, declining by ... 1.3 percent.

Furthermore, the poverty rate, at 12.6 percent, remained well above its 11.7 percent rate in 2001, while median household income was $243 lower than in 2001 (not a statistically significant difference).  In addition, both the number and the percentage of Americans who lack health insurance climbed again and remained much higher than in 2001.  Four million more people were poor, and 5.4 million more were uninsured, than in 2001.  The percentage of children who are uninsured rose in 2005 for the first time since 1998.

The Poor Become Poorer

The poor also became poorer.  The amount by which the average person who is poor fell below the poverty line ($3,236) in 2005 was the highest on record, as was the share of the poor who fell below half of the poverty line....

Results Disappointing for this Stage of an Economic Recovery “Four years into an economic recovery, the country has yet to make progress in reducing poverty, raising the typical family’s income, or stemming the rise in the ranks of the uninsured...” Center executive director Robert Greenstein said. “It is unprecedented in recoveries of the last 40 years,” he noted, “for poverty to be higher, and the typical working-age household’s income lower, four years into a recovery...”

Assessing Student Achievement

I received a couple of emails about this report, and it caught my attention as well. Like Greg Mankiw, I don't understand why the government feels it needs to get more involved in higher education. Greg says:

Higher Education Report, by Greg Mankiw: Today's NY Times reports:

A federal commission approved a final report on Thursday that urges a broad shake-up of American higher education. It calls for public universities to measure learning with standardized tests, federal monitoring of college quality and sweeping changes in financial aid.

The Washington Post notes:

A commission member representing nonprofit colleges declined to sign on, however, saying the report reflected too much of a "top down" approach to reform.... [David] Ward said he supported many of the commission's objectives, but opposed "one-size fits all" prescriptions that fail to reflect the differing mission of colleges.

Ward makes a good point. Higher education in the United States is highly diverse and competitive, and these features are among the strengths of the system. Any attempt to centralize oversight in the federal government is likely to be counterproductive.

I typically support standardized tests. For college admissions, for example, objective measurements of ability and achievement, though imperfect, are more free of bias than are subjective judgments from recommendations and interviews. In my Ec 10 class, multiple-choice questions are a significant part of the evaluation process. But I cannot imagine a standardized test that would be appropriate to test a large number of exiting college students, whose experiences are so heterogeneous...

I agree with Greg on the main point. If what I am teaching my students can be measured with a standardized multiple-choice test, then I'm not doing my job.

For that reason, unlike Greg, I refuse to give multiple-choice tests even for introductory classes with hundreds of students. An A- rather than an A could make the difference someday for admission to a particular graduate school, obtaining a dream job, etc., and I feel obligated to give the best possible assessment of what students have achieved. My experience is that written tests are much more discriminating and revealing than multiple choice tests. It's a lot more work than selecting questions from a test bank and running the answer sheets through a Scantron, and I don't think TAs ask to be assigned my courses, but as I said I think it allows me to see what students know much better.

The main reason, though, is that it also forces students to learn the material beyond the more superficial level that often works on multiple choice exams and getting the most learning out of them is the important thing. Many students don't like essays/problems because they are more work, but I'll take the resentment if they learn more at the end of the day. And not all students prefer multiple choice. I know I always felt I had an advantage when I could fully express what I knew in essay/problem form instead of second guessing myself on some stupid "a and e only" answer.

My view is not widely held. Most people don't have a problem with using multiple choice tests to assess how much students have learned, i.e. they don't believe that moving to essay tests would improve assessment enough to make it worth the effort and at many schools budget realities force this choice. But if multiple choice tests are used in nearly every class a student takes, that makes it harder to oppose exit tests designed to test knowledge of the same material.

Do You Believe in Markets?

Jeffrey Miron, who describes his blog as "a libertarian perspective on economic and social policy," on liberals in academia:

The Liberal "Bias" in Academia, by Jeffrey Alan Miron: A long-standing complaint of the political right is that academia displays a strong liberal bias. In a recent op-ed, Debra Saunders of the San Francisco Chronicle discusses two recent studies that document the overwhelmingly prevalence of Democrats among academics...

[T]he disproportionate share of Democrats is not in serious dispute. And no one who has spent time in academia would find any reason to think otherwise.

The facts raise an interesting question, however, and one that should trouble right-wing critics of the current situation: why is liberal dominance of academia a problem given that it represents a market outcome? That is, if liberal academics are so bad, why does the market support so many of them? Why is there not a demand for conservative universities? If one believes markets do things right, in what sense is the liberalism in academia excessive?

A possible response from conservatives might be that higher education is not a competitive market; a substantial fraction of higher education is owned and operated by state governments. This line is not persuasive, however, since many of the most successful colleges and universities are private, and they are every bit as liberal as their government counterparts.

So free-market critics of the liberal "bias" in academia need to think through their criticism. In what sense is Democratic predominance a problem? And what "market failure" is responsible?

Perhaps the truth is that many conservatives do not really believe in competition; instead they want conservative ideas imposed because these ideas are not doing well in the marketplace.

"Comparative Advantage, Comparative Advantage, Wherefore Art Thou, Oh Comparative Advantage?"

An email suggested looking at this paper by Richard Freeman on globalization and trends in U.S. and worldwide labor markets. It was a good suggestion. This is longer than usual even though I cut quite a bit, but well worth the time it takes to read it:

Labor Market Imbalances: Shortages, or Surpluses, or Fish Stories?, by Richard B. Freeman, Boston Federal Reserve Economic Conference: There are two competing narratives about the how the labor market in the US will develop over the next decade or two.

The Impending Shortage narrative, which has attracted attention from business and policy groups, is that the retirement of baby boomers will create a great labor shortage. Slower growth of new entrants from colleges and universities, an increased proportion of young workers from minority groups, and inadequate training in science and math will produce a shortage of the skills the country needs to maintain itself as the leading economy in the world. The message to policy makers is to forget about the sluggish real wage growth of the past three decades, the deterioration in pensions and employer provided health care, and fears of job loss from off shoring or low wage imports. Instead policy should focus on helping business find workers in the coming shortage.

Shortage claims have focused on science and engineering. Many leaders of the scientific establishment and high tech firms have complained that the US faces a shortfall of scientists and engineers and have asked for governmental policies to address this problem. ... The heads of Intel, Microsoft, and other high tech firms have spoken out on this issue as well. ...

But the shortage claim goes beyond science and engineering. Demographic projections of the US labor supply that show a sharp reduction in the growth of the work force through 2050 (see table 1) have aroused concern in the business and policy community. Reporting the consensus from the Aspen Institute’s Domestic Strategy Group, David Ellwood stated that: "CEOs, labor leaders, community leaders, all came to the unanimous conclusion that we will have a worker gap that is a very serious one.“ ... A 2003 Fortune Magazine headline declared “Believe It or Not, a Labor Shortage Is Coming” for virtually all workers (Fisher, 2003).

Believers in the impending shortage story generally favor increased immigration, particularly of highly skilled workers through H1B and other visas; increased spending on education and technological innovation; and guest worker programs to keep a sizable flow of less skilled but legal immigrants coming to the country. They regard many of these immigrants as complements rather than substitutes for US workers. They also advocate greater education and training of US citizens, particularly of disadvantaged minorities.

The Globalization Surplus narrative, which has attracted attention as part of discussions of the current mode of globalization, takes the opposite tack. It holds that the spread of global capitalism around the world, particularly to China and India, has generated a labor surplus that threatens wages in advanced and higher wage developing countries. Trade, off-shoring, global sourcing of jobs, and flows of capital to the low wage giants combine to reduce the demand for workers in manufacturing and tradable services in advanced countries and in moderate income developing countries.

At first, the advent of huge numbers of workers from India and China into the global capitalist system seemed to offer a boon to most workers in advanced countries. The labor force is less skilled in the global giants than in the advanced economies. According to the Heckscher-Ohlin model, skilled workers in the advanced countries would benefit from the new trading opportunities while only the relatively small number of unskilled workers would lose. If all workers in the North were sufficiently educated, they would avoid competing with low paid labor overseas and benefit from the low priced products produced there. Competition from low wage workers in China and India might create problems for apparel workers in Central and Latin America or for South Africa, but not for ... the advanced North. Similarly, the “North-South” trade model that analyzes how technology affects trade between advanced and developing countries implied that trade would benefit workers in the North, who had exclusive access to the most modern technology. More low wage workers in the developing world would lead to greater production of the goods in which the South specialized, driving down their prices.

Tell it to Lou Dobbs! The off shoring of computer jobs, the US’s trade deficits even in high technology sectors, and the global sourcing strategies of major firms have challenged this sanguine view. The advent of China, India, and the ex-Soviet Union shifted the global capital-labor ratio massively against workers. Expansion of higher education in developing countries has increased the supply of highly educated workers and allowed the emerging giants to compete with the advanced countries even in the leading edge sectors that the North-South model assigned to the North as its birthright.

Which narrative better fits the labor market? ... In this paper I assess the two competing visions and the demographic and economic projections on which they are based. I reject the notion that the retirement of baby boomers and slow growth of the US work force will create a future labor shortage in favor of the argument that the increased supplies of skilled labor in low-wage countries will squeeze highly skilled as well as less skilled US workers. I examine the problem of attracting native US talent in science and engineering in the face of increasing supplies of highly qualified students and workers from lower wage countries. Going beyond the US, I argue that the expansion of global capitalism to China, India, and the former Soviet bloc has initiated a critical transition period for workers around the world. Pressures of low wage competition from the new giants will battle with the growth of world productivity and the lower prices from those countries to determine the well being of workers in higher income economies as the low-income countries catch up with the advanced countries. While US wages will not be “set in Beijing” how workers fare in China and India and other rapidly developing low wage countries will become critical to the position of labor worldwide.

Blogging and Academics

This is not the first time this question has been addressed in blog land, but there are some interesting views on the topic collected in one palce, so I thought it was worth bringing up again. It's about blogging and academic careers (via Daniel Drezner):

Can Blogging Derail Your Career?, 7 Bloggers Discuss the Case of Juan Cole, The Chronicle Review: With the debut of his Web log, Informed Comment, four years ago, Juan R.I. Cole became arguably the most visible commentator writing on the Middle East today. A professor of modern Middle East and South Asian history at the University of Michigan at Ann Arbor and president of the Middle East Studies Association, Cole has voiced strong opposition to the war in Iraq and to the treatment of the Palestinians, garnering him plaudits from the left and condemnation from supporters of Israel and President Bush's foreign policy. In the words of a colleague, Cole has done something no other scholar of the region has done since Bernard Lewis: "become a household word."

In the spring, Informed Comment took center stage in another arena — Cole's own career. After two departments recommended him for a tenured position at Yale University, a senior committee decided last month not to offer him the job after all. Although Yale has declined to explain its decision, numerous accounts in the news media have speculated that Cole's appointment was shot down because of views he expressed on his blog. We asked seven academic bloggers to weigh in on Cole's case and on the hazards of academic blogging.

• The Lessons of Juan Cole, by Siva Vaidhyanathan
• The Politics of Academic Appointments, by Glenn Reynolds
• The Trouble With Blogs, by Daniel W. Drezner
• Exposed in the Blogosphere, by Ann Althouse
• The Invisible College, by J. Bradford DeLong
• The Attention Blogs Bring, by Michael Bérubé
• The Controversy That Wasn't, by Erin O'Connor
• Juan R.I. Cole Responds

Here's Brad's contribution followed by my comments. I may follow with some of the other contributions later [Update: Brad DeLong just posted summaries of a few other contributions as well as his own, which is repeated below]:

The Invisible College by J. Bradford DeLong, The Chronicle Review Volume 52, Issue 47, Page B8: Right now I'm looking out my office window, perched above the large, grassy, Frisbee-playing, picnicking, and sunbathing area that stretches through Berkeley's campus. I'm looking straight out at the Golden Gate Bridge. It's a view that I marvel at every dayI wonder why the chancellor hasn't confiscated such offices and rented them out to hedge funds to improve the university's finances.

I walk out my door and look around: at the offices of professors who know more about topics like the history of the international monetary system or the evolution of income distribution than any other human beings alive, and at graduate students hanging out in the lounge. It's a brilliant intellectual community, this little slice of the world that is our visible college. You run into people in the hall and the lounge, and you learn interesting things. Paradise. For an academic, at least.

But I am greedy. I want more. I would like a larger college, an invisible college, of more people to talk to, pointing me to more interesting things. People whose views and opinions I can react to, and who will react to my reasoned and well-thought-out opinions, and to my unreasoned and off-the-cuff ones as well. It would be really nice to have Paul Krugman three doors down, so I could bump into him occasionally and ask, "Hey, Paul, what do you think of .. ." Aggressive younger people interested in public policy and public finance would be excellent. Berkeley is deficient in not having enough right-wingers; a healthy college has a well-diversified intellectual portfolio. The political scientists are too far away to run into by accident — somebody like Dan Drezner would be nice to have around (even if he does get incidence wrong sometimes).

The Need for Immigration

A defense of businesses employing migrant workers from the director-general of the British Chambers of Commerce:

Employers are not the villains in the battle over immigration, by David Frost, Commentary, Financial Times: The publicity surrounding the launch of the government’s proposals on asylum and immigration, due tomorrow, has focused heavily on punishing British businesses for employing illegal migrants.

As far as business is concerned this is a complete diversion. The real issue is the fact that UK companies are increasing their use of legal migrant labour at an enormous rate. ... Businesses tell me that the single biggest problem they face is finding the skilled people they need to drive their businesses. They are solving the problem by employing migrant labour.

At the root of this, our school system is not providing significant numbers of our young people with the foundation in essential skills they need for the workplace. Only 44 per cent of school-leavers gain five GCSEs at grade A to C including English and maths. The Department for Education and Skills views this standard as the very minimum employability skills for basic productivity. In addition, there are up to 8m adults lacking the very lowest level of literacy and numeracy needed for the world of modern work.

The response of the business community to the poor quality of young people entering the labour market is to look increasingly to migrant labour, particularly from central Europe and specifically Poland. Employers tell me the reasons for this are simple and twofold: migrants have higher-level skills and a far better attitude to work than local people. They are enthusiastic and committed. ... Indeed, I met the owner of an electronics company in the east of England this month who has now given up recruiting through local newspapers. He finds it more cost effective to send his human resources manager out to Poland to recruit directly.

While business needs continued managed migration, we have to question whether this is the panacea for the UK’s skills shortages. We could be storing up significant social problems, especially in urban areas, if we assign the large number of young people with no qualifications and no work ethic to the scrap heap. Overall numbers in the labour market are rising, but so are the numbers of unemployed. It will not be a cohesive society if we have increasing numbers of migrants employed but at the same time the indigenous population is unable to find jobs.

The government must, therefore, ensure that the education system is fit for purpose. ... The current focus ... within our schools is divisive and elitist. The education system must engage all young people, whatever their talent or ability, and inspire them to learn and succeed. Our businesses and economy need skilled young people...

In addition, the government must ensure that the tax and benefits system acts as an incentive to get people into work. It is clear, particularly in the case of hourly-paid employees, that it does not currently provide a strong enough incentive... Until these issues are dealt with, migration will continue to play an ever growing role in addressing the needs of British business.

The British Chambers of Commerce will never support employers who flout the law and employ illegal immigrants. Indeed, ... employers who knowingly take on illegal immigrants [must be] punished accordingly. However, the overwhelming majority of employers are keen to ensure that they are operating within the constraints of the law. What business needs is an immigration process that is simple, clear and transparent...

But the employment of illegal migrants is a minor part of the issue and it is disingenuous to imply otherwise. The government should concentrate on solving the problems that are making our economy dependent on migration instead of shifting the blame for the failure of its complex and bungled immigration policy on to business.

I don't know how the percentage of illegal immigrants in the U.K at various skill levels compares to the numbers here, but this is directed mainly at high skill, not low skill immigration. To that extent, I agree with the main thrust of the argument - it's a nasty sort of bait and switch when we let our schools deteriorate and then claim we must allow high skill immigration because domestic workers aren't up to the task and the needs of business must take precedence in the global economy.

So long as cheap skilled labor is available elsewhere, business does not have a strong incentive to participate in efforts to improve the skill level of domestic workers. Notice he says "government should concentrate on solving the problems that are making our economy dependent on migration instead of shifting the blame ... to business." He calls on government to do more, but the attempt is to absolve business of responsibility for problems. He doesn't call for business to share in the responsibility and participate in the effort by, minimally, helping to set the political tone needed to make the improvements in domestic education he desires.

Update: Comments lead me to believe that perhaps my assertion that this is directed at higher skill immigration is incorrect. The talk of the biggest problem being businesses "finding the skilled people they need," the mention of "skills shortages," and that "migrants have higher-level skills" as well as the electronics firm example (which I took to mean high-skill employment) led me astray...

Why Oh Why is Income Inequality Increasing?

That increasing income inequality is a reality is widely acknowledged by economists, the debate has shifted to the source of the inequality, e.g. see Brad DeLong, Greg Mankiw, Paul Krugman, and Alex Tabarrok for openers. Is it due to a skill premium, non-linearities in returns to education, a rising oligarchy, a winner take all economy, luck, or some other factor?:

Brad DeLong: Optimal Tax Policy: An old New York Times column by Hal Varian:

Hal Varian: In the debate over tax policy, the power of luck shouldn't be overlooked: Those who argue for a more progressive income tax emphasize equity: a tax dollar paid by a rich person causes less pain than a tax dollar paid by a poor person. Those who argue for a less progressive system emphasize efficiency: the most productive people should face lower tax rates to give them strong incentives to work harder and produce more.... This formulation of the optimal income tax problem was first examined by the economist James Mirrlees of Cambridge University, who received a Nobel in economic science for his analysis. In the simplest version of the Mirrlees model... those at the very top of the income scale should face low marginal rates....

Of course, the fact that it pays to reduce the marginal tax rate for billionaires doesn't say much about what tax rates should be like for mere millionaires.... But the intuitive argument presented above is pretty compelling: if income depends only on ability, those at the very top of the income-ability distribution should face low marginal tax rates.

But perhaps this model is too simple.... So let's consider a different model: one in which differences in income are a result only of luck.... In this case, the optimal income tax may well involve taxing billionaires at very high marginal rates. True, aspiring billionaires won't work quite as hard.... But the chances of becoming a billionaire are pretty low anyway, so taxing billionaires at a high rate won't really discourage much effort by those hoping to become one.... This is about as far as theory can take us, but it highlights the critical question: How much income results from ability and how much from luck?...

Christopher Jencks, and his collaborators pointed out many years ago that income inequality among brothers, who share similar genetic and environmental characteristics, is almost as great as for the population as a whole....

If luck plays a substantial role... it makes sense to have a progressive income tax, creating a form of social insurance in which the lucky subsidize the unlucky. Perhaps the folk singer Phil Ochs had the best answer for why the upper half of the income distribution should pay so much more in taxes than the lower half: ''And there but for fortune, may go you or I.''

SmartEconomist: Business Education and Executive Jobs

Q&A 10 - Next: Business Education and Executive Jobs Stanford GSB Professor Paul Oyer will answer readers' questions on the value of business education, on how the macroeconomic situation affects career choices, on the effectiveness of firms’ incentives, and on the implications for personnel policies. Ask Your Question

Q&A 9 - July 10, 2006: Open Source and Patents UC Berkeley Professor Bronwyn H. Hall answered readers' questions on the relative advantages and disadvantages of open source vs. intellectual property rights (IPR) in knowledge creation, on the role of innovation management in firms and universities, and on the implications for technology policy. Read Q&A

Government's Business

This commentary on the President's management style speaks for itself, so other than to note this piece by former Bush economic adviser and Columbia Business School Dean Glenn Hubbard who defends MBAs and uses President Bush as an example, I'll let it do just that:

President wanted, MBA not required, by Charles R. Kesler, Commentary, LA Times: George W. Bush is the first president with an MBA (from Harvard Business School, no less), but it's not clear that being a master of business administration has made him a better chief executive. The disarray in Iraq, the debacle after Hurricane Katrina — these aren't exactly the kinds of triumphs that the alumni office likes to boast about. ...

It's hard to say what President Bush absorbed from his management studies. We can only draw inferences, though eventually historians may know more. Defending Donald H. Rumsfeld a few weeks ago, Bush said: "I hear the voices, and I read the front page, and I know the speculation. But I'm the decider, and I decide what is best. And what's best is for Don Rumsfeld to remain as the secretary of Defense."

Being the decider-in-chief suggests one paradigm of modern management: the executive who makes the final decisions, the tough calls. He "hears" and even listens to others before deciding... Bush's management style is long on decisions and short on explanations. He's apparently better at listening to others than questioning their views. He prefers to have around him people whose judgment he trusts implicitly, even as he insists that they trust and abide by his decisions implicitly.

This isn't simple cronyism or "hackocracy," as the left charges. But neither is it a model of political wisdom. It leads to a disinclination to deliberate, a reliance on peremptory assertions of subordinates' good character to quiet doubt about their judgments, and a certain habitual speechlessness. On ordinary rhetorical occasions, Bush and his text seem hardly acquainted. On great occasions, he tends to overshoot the mark, calling for impossibilities such as an "end to evil." He lacks a rhetorical mean, much less the rhetorical mien that served Ronald Reagan so well. ...

The GOP loves to call for applying the businessman's common sense to government problems. Rumsfeld, a former Fortune 500 executive, is applying business methods (just-in-time inventories, information networks, strict control of labor costs) to try and transform the Pentagon and, while he's at it, win the war in Iraq.

The precedents aren't entirely encouraging. In the 1960s, Secretary of Defense Robert McNamara tried to revolutionize the Pentagon using the systems analysis techniques he'd championed in his former job as president of Ford Motor Co. He succeeded in discrediting himself, the techniques and the war he was trying to win.

Pray things work out better this time. In general, however, the analogy between business and politics so beloved by Republicans is a flawed one. At the simplest level, politicians report to a large electorate and have fixed terms of office; businessmen do not. And although the latter can hire and fire at will, the former cannot, and thus face vast, recalcitrant bureaucracies.

Second, government deals not merely with property, ... but also with life and liberty. Government thus involves issues of national defense, criminal justice and other "involuntary transactions" backed by a monopoly on the legitimate use of force.

Third, though both pursuits involve self-interest, economic self-interest is less complicated. By contrast, there are many forms of political self-interest, frequently in conflict: Should you desire security or glory? Low taxes or a balanced budget? Much political skill must be devoted to persuading people where, exactly, their interest lies. (This is the rhetorical part, at which Bush doesn't excel.)

Finally, and most significantly, politics has to reconcile multiple goals — consent, security, liberty, prosperity, justice, virtue — in the presence of continuing disagreements about both means and ends. These inherent differences frustrate, eventually, all businesslike schemes of government. Too bad they don't teach that in business school.

Glenn Hubbard Defends Business Schools

Yesterday, I defended a liberal arts education. Today, Columbia Business School Dean and former Chair of the Council of Economic Advisers for the Bush administration Glenn Hubbard defends business schools and MBAs:

Do not undervalue the impact of business education, by Glenn Hubbard, Commentary, Financial Times: I expected many surprises as the new dean of a business school, but not an immediate challenge to defend the idea of business education. Until my appointment, I had seen no reason for such challenges...

A tough take on business schools came in a 2005 Harvard Business Review article by Warren Bennis and James O’Toole saying that “MBA programmes face intense criticism for failing to impart useful skills, failing to prepare leaders, failing to instill norms of ethical behaviour – and even failing to lead graduates to good corporate jobs”. In business circles, this is shocking – something like L’Osservatore Romano asking: do we still need a pope?

Such criticisms should be taken seriously. Pure theory pulls the academy apart from the worlds of commerce, industry and finance. And if the MBA does not at least cultivate leadership, what good is it? ... We are so enmeshed in a world shaped by business principles that only the big picture can remind us of its power.

For example, why did social conditions not change for the human race for thousands of years until England’s industrial revolution in 1750? Why did that revolution begin with the Spinning Jenny in the mid-18th century and not in the mid-first century AD when Hero of Alexandria developed a steam engine? Columbia Business School’s Bruce Greenwald says that human progress “appears to have arisen largely from the application of sustained management attention to everyday enterprise”. In a word, business. ...

Countries today prosper or fail to the extent that they embrace basic business principles. The task of the business school is, then, enormous – to apply knowledge to transform financial markets, to convince other societies of the benefits of transparency and to remind our own opinion leaders of the value of basic business principles. We have largely succeeded in the US, which is seeing sustained increases in growth of about 3.5 per cent a year with little inflation... This one percentage point addition to growth is happening ... because of improvements in productivity.

Why, then, is the US adding productivity growth when so many other big economies see negative growth in productivity? Those who say the answer is technology have spent too little time in Tokyo, Seoul and Berlin. The fact is, technology is better in many other countries. So US companies did not become more productive by simply buying faster computers. They became more productive by having managers and entrepreneurs who knew how to integrate these investments with new business models to raise productivity. These abilities to think strategically are teachable; and the central classroom for teaching leaders ... is the business school.

Many measure success by the salaries of business graduates after school. This is irrelevant. The real value of a business education is its impact years later, training future leaders how to unlock one set of problems after another. Business schools have pulled this off by integrating disciplines within the university and integrating academics with business leaders.

But the critics have a point. The present challenge for the top business school is to inspire researchers to be in even closer contact with business leaders, to answer real-world needs. By generating cutting-edge ideas that bridge theory and practice, a great business school’s research offers an education for a lifetime career, not just a toolkit for a first job. ...

State Universities, Competition, and Access for Low-Income Students

Here's a bit more on public universities and the effects of falling state support. As support has fallen, there has been an increased reliance on tuition, private sector funding of research, and donations as a means of funding, all of which subject state universities to market pressures that did not exist in the past.

How will universities respond? Of particular interest is whether the change will affect the ability of universities to provide access to low-income students. Do universities face competition and does that impact their ability to provide access? This is the enrollment manager at Oregon State University, which is about 40 or so miles north of us here at the University of Oregon, in an interview with The Atlantic magazine:

The Best Class Money Can Buy,  by Mathew Quirk,  The Atlantic:  I asked Bob Bontrager what he thought about eating other people's lunches.

"I personally prefer kicking their ass," he replied. "It's a zero-sum game. There's a finite number of prospective students out there. Are you going to get them, or is your competitor going to get them? You face the pressure and say, 'That feels burdensome to me; I don't want to deal with that.' Or you say, 'That's a pretty interesting challenge; I'm going to go out there and try to eat their lunch. I'm going to try to kick their ass.' That defines people who are more or less successful and those who stay in the position."

Bontrager, who works at Oregon State University, is the school's head of enrollment management—a relatively new but increasingly essential post in higher education. Three quarters of four-year colleges and universities employ an enrollment manager to oversee admissions and financial aid. The position is standard at private schools, and is spreading quickly across public institutions.

Over the past twenty years, often under cover of the euphemisms with which the industry abounds, enrollment management has transformed admissions and financial aid, and in some cases the entire mission of a college or a university. At its most advanced it has a hand in every interaction between a student and a school, from the crafting of a school's image all the way through to the student's successful graduation. Any aspect of university life that bears on a school's place in the collegiate pecking order is fair game: academic advising, student services, even the curriculum itself. Borrowing the most sophisticated techniques of business strategy, enrollment managers have installed market-driven competition at the heart of the university.

With their ever-expanding reach, enrollment managers are inevitably dogged by controversy. But it's the way they have changed financial aid—from a tool to help low-income students into a strategic weapon to entice wealthy and high-scoring students—that has placed them in the crosshairs of those who champion equal access to higher education. Adopting data-mining and pricing techniques from the airline and marketing industries, they have developed a practice called financial-aid leveraging that allows a school to buy, within certain limits, whatever class it wants. Often under orders from a president and trustees, enrollment managers direct financial aid to students who will increase a school's revenues and rankings. They have a host of ugly tactics to deter low-income students and to extract as much money as possible from each entering class.

All this, understandably, has given the enrollment-management industry a black eye. "It's a brilliantly analytical process of screwing the poor kids," says Gordon Winston, an economist at Williams, and an article last year in The Chronicle of Higher Education included a warning that "enrollment managers are ruining American higher education." But some in the industry use its techniques responsibly—to guarantee enough revenue to support the academic mission, or even to expand low-income access to higher education. Indeed, the sophisticated methods of enrollment management may be the only way for schools to hang on to their principles while surviving in a cutthroat marketplace. [... continue reading ...]

I'm told Bontrager was asked to use different language when descibing his competitive spirit to the media. We have an enrollment manager, and she relies on the results of an econometric model that has been developed over many years by colleagues to help uncover the responsiveness of enrollment to changes in enrollment policy and the implementation of programs designed to affect recruitment and retention. It's been a helpful tool.

The effect on access for low-income students is a big concern, though I know both the Admissions/Enrollment Manger and Financial Aid Directors here and they certainly fall into those trying to preserve the core mission of equal access and are among the most devoted advocates of these principles.

But the tension is there -- our funding and ability to provide quality education depends critically on these revenue sources -- and we have also instituted scholarship programs designed to attract quality students irrespective of need. These programs are based, in part, upon knowledge about elasticities gleaned from the econometric estimation of enrollment decision models and other statistical work and they do pay attention to the revenue that is generated.

My view from the inside, for what it's worth, is that people are worried about these issues and doing their best to preserve access, but the pressure is there and the argument that always carries the day is that we must survive to serve any low-income students at all even if that means serving fewer low-income students than we might desire to fulfill our commitment to equal opportunity. Over time, in a competitive marketplace, that leads to incentives and outcomes that bear watching as a matter of public policy.

If you are interested in these issues, the article does a good job or presenting the tensions universities feel to maximize revenue at the expense of other values such as equal access, though it may be a bit strident on the access issue.

The Decline of Liberal Arts Education

Reading this piece in Project Syndicate about the future of European universities reminded me of discussions about the decline of classic liberal arts education in the U.S. Let's start with this essay by Warren Goldstein, chair of the History Department at the University of Hartford, appearing in the Yale Alumni Magazine.

This echoes my own experience. When I was Department Head, I began bringing back former students who had found success in the business world to talk to our undergraduate majors about how best to prepare for the working ("real") world. Time and again I heard the view expressed in this article, that businesses want people who can think, write, analyze, develop persuasive arguments, they want the type of skills a liberal arts education is intended to promote. With that foundation, they would tell me, they can teach the people the skills needed to do the job effectively. Some were adamant in their refusal to hire business school graduates, preferring instead to hire people with the broad set of skills acquired with a broader education. Economics generally received praise, not so much for specific theoretical tools we teach, but rather for the way it taught students to think about the world and approach problems:

What would Plato do? A (semi-)careerist defense of the liberal arts, by Warren Goldstein, Yale Alumni Magazine:

Nahh, don't tell me -- I bet I can guess your major: art history, right? -- Tom or Ray Magliozzi

If you're an NPR listener, you've probably heard some version of this line on Car Talk. Usually the hapless college student on the phone is female, and Tom and Ray (aka Click and Clack...) are showing their avuncular concern for her employment prospects. ...[L]iberal arts-bashing is one of their favorite sports. As far as I can tell, from my turret in the besieged educational outpost of the liberal arts, nearly all parents of college-age students agree with them. ...

The 'Creative Economy' and the Future of the American Worker

Richard Florida of George Mason University writing in Cato Unbound says developing the creative class is the key to success in the global economy:

The Future of the American Workforce in the Global Creative Economy, by Richard Florida, Cato Unbound: ...American economic experts and policy-makers are rightly preoccupied with the emergence of behemoths like India and China, which offer huge markets, capable workforces, and cost advantages. Unfortunately, they overlook a subtler but even more profound shift in the nature of global competition. ... where knowledge, innovation, and creativity are key. At the cutting edge of this shift is the creative sector of the economy: science and technology, art and design, culture and entertainment, and the knowledge-based professions.

The U.S. is at the forefront of this global creative economy. Over the next decade, it’s projected to add 10 million more creative sector jobs, according to the newest numbers from the Bureau of Labor Statistics. At the present rate of increase, creative jobs alone will soon eclipse the total number of jobs in all of manufacturing. ...

Such remarkable job growth goes far beyond technology and engineering. While the U.S. economy will add 950,000 computer jobs and another 195,000 in engineering, the biggest gains by far will be in health care and education, which will add more than 3.5 million. Jobs for college professors alone are projected to increase by more than half a million. Arts, music, culture, and entertainment will contribute some 400,000 new jobs. That’s twice as many as engineering.

The rise of this global creative economy changes the rules of international competition in four crucial ways.

Correlation is Not Causation: Museums and Elite Colleges

Tyler Cowen at Marginal Revolution finds:

How to get your kid into a better college:

The only out-of-school activity that increased the likelihood of a student ending up enrolled at an elite college was parental [sic] visits to art museums.

That is correlation, not causation....  Read more here. How about this?

Two types of participation made it more likely students would end up at elite colleges: yearbook or school newspapers and “hobby clubs.”  ...Numerous activities had no apparent impact on whether or not students will end up in college — elite or otherwise. School plays, interscholastic individual sports, intramurals, cheerleading, academic honor societies, public service clubs — no impact is clear from any of them.

... What do you all think of these results?

Here's more from the link above explaining why the authors think the correlation between parents going to art museums and kids getting into elite colleges is causal:

And to the extent that parents who visit art museums (even without their children) are likely to talk about high art and culture, their children (if they pay even a little attention) will pick up cultural knowledge that their peers lack. And if those parents teach their children to name drop, there could be an impact, especially if it allows students to shine in interviews. “A chance mention of the new Bertolucci film or the Ruscha show at the Whitney may tip an applicant from one pile to another,” the authors write.

This is telling, "There’s no correlation between visiting art museums and ending up at a top college yourself." I wonder what else you could find that is "caused" by parents going to art museums?

Business Without Borders

A recent paper "Are Elite Universities Losing Their Competitive Edge," by E. Han Kim, Adair Morse, Luigi Zingales (discussed by Greg Mankiw) argues that information technology has eroded locational externalities in economics, the advantage of having good colleagues around for collaboration. The advantage of being at Harvard isn't what it used to be:

We study the ... research productivity of economics and finance faculty who have ever been affiliated with the top 25 universities in the last three decades. We find that there was a positive effect of being affiliated with an elite university in the 1970s; this effect weakened in the 1980s and disappeared in the 1990s. We find ... that its decline is due to the reduced importance of physical access to productive research colleagues.

The collaborative efforts among academics occur between people within countries and between people in different countries.

Thomas Friedman says a similar phenomena is happening in the world of business, locational advantage is falling and this can also occur both within and between countries. Because of this, in many cases what appears to be outsourcing is really something else, global collaboration. With global collaboration there is no real home to the ideas that are being produced anymore than there is a home to a mathematical proof done jointly by two people through a series of emails with attachments or some other information sharing technology. Because global collaboration opens up considerable opportunities that didn't exist previously, enhancing these opportunities increases world economic growth and has the potential to create new jobs and help to lift the poor out of poverty, even more so if developing countries have the ability to take advantage of the opportunities afforded by such collaborative efforts:

Outsourcing, Schmoutsourcing! Out Is Over, by Thomas L. Friedman, Commentary, NY Times: ...I was recently interviewing Ramalinga Raju, chairman of India's Satyam Computer Services ... one of India's top firms doing outsourced work from America, and Mr. Raju told me how Satyam had just started outsourcing some of its American work to Indian villages. ... There is enough bandwidth now, even reaching big Indian villages, to parcel out this work, and the villagers are very eager. "The attrition level is low, and the commitment levels high," Mr. Raju said. "It is a way of breathing economic life into villages." It gives educated villagers a chance to stay on the land, he said, and not have to migrate to the cities.

A short time later I was interviewing Katie Jacobs Stanton, a senior product manager at Google, and Krishna Bharat, founder of Google's India lab. They told me that Google had just launched Google Finance, but what was interesting was that Google Finance was entirely conceived by the Google team in India and then Google engineers from around the world fed into that team — rather than the project's being driven by Google headquarters in Silicon Valley.

It's called "around sourcing" instead of outsourcing, because there is no more "out" anymore. Out is over. ... Mr. Bharat added: "We have entered the generation of the virtual office. Product development happens across the global campus now."

Last story. ... I meet Andy Astor, chief executive of EnterpriseDB, which provides special features for the open-source database called PostgreSQL. His primary development team ... consists of 60 Pakistani engineers in Islamabad... "The New Jersey team — software architects, product managers and executives — comes to work a couple of hours early, while the Islamabad team comes in late, and we have at least five to six hours per day of overlap," Mr. Astor said. "We therefore have multiple face-to-face meetings every day, which makes a huge difference... We treat videoconference meetings as if we were all in the same room."...

[W]e are seeing the emergence of collaborative business models that were simply unimaginable a decade ago. Today, there are so many more tools, so many more ideas, so many more people able to put these ideas and tools together to discover new things, and so much better communications to disseminate these new ideas across the globe.

If more countries can get ... enough telecom and bandwidth so their people can get connected; steadily improving education and decent, corruption-free economic governance; and the rule of law..., there is every reason for optimism that we could see even faster global growth in this century, with many more people lifted out of poverty.

I'm not happy that the song "It's a Small World" is now playing in my head. Damn you Tom Friedman. Still, this seems like a pretty good argument for policies that encourage, or at least do not limit, this type of global collaborative effort.

Growing Income Inequality and the Education Gap

Edward Lazear and Katherine Baicker of the President's Council of Economic Advisers say the growing disparity in wage income between skilled and unskilled labor is not the result of globalization, immigration, or administration policy. The reason for growing income inequality, they say, is increasing returns to education for skilled labor, and this is an opportunity not a problem. "Having an economy that places a greater value on skills and education is a good thing."

They promote a solution to the problem of growing income inequality that attempts to take advantage of this opportunity by reducing the education and skill gap. Three particular steps are recommended as solutions, the No Child Left Behind education reform, the American Competitiveness Initiative, and more importantly they say as responsibility is shifted away from government, is the hope that families will do a better job to "provide the environment and encouragement that is so helpful in producing an educated population":

America at Work, by Edward P. Lazear And Katherine Baicker, Commentary, Wall Street Journal: There is no question that the U.S. is experiencing strong economic gains... The economy created about two million jobs last year, and Friday's jobs report for April showed that we are on track to add more than two million new jobs this year.

This job growth is undeniable, but some ... claim that the benefits of this economic boom are being enjoyed only by the relatively well-off, and that we have left the rest of our workforce behind. Is this true? Over the last 25 years, the wages of the skilled have continued to grow faster than the wages of the less skilled. For example, the wages of the college-educated have grown by 22% since 1980, while the wages of high-school drop-outs has fallen by 3%.

This does not mean, however, that the rich are benefiting at the expense of the poor. Instead, it means that the return to investing in education and training continues to grow. ... Having an economy that places a greater value on skills and education is a good thing. Our economy can grow more quickly when the returns to investment are high, and human capital investment is the most important form of investment.

This presents us with opportunities and challenges. We have the opportunity to increase our standard of living as our workers reap the benefits of the skills that they have acquired. We face the challenge of ensuring that all Americans have access to the education and training that the modern economy values so highly.

The data show that it is this greater return to investing in education that is driving the long-run widening of the income distribution. The cause is not increases in immigration or international trade, as some have alleged. First, wages for less-skilled workers have not declined with growing trade, even in sectors of the economy with the greatest import competition. Second, some of the groups that have experienced the highest wage growth have also seen increased immigration swelling their ranks. Silicon Valley is full of highly paid immigrants and native-born Americans ... earning very high salaries in the high-tech sectors ... Third, those who have examined the data systematically find that trade and immigration can account for at most a small proportion of the increased wage spread that has occurred over the past 25 years.

To make sure that the gains from technology are enjoyed by all, we must be vigilant in providing training and educational opportunity for all. Programs such as the No Child Left Behind ... and American Competitiveness Initiative are vital steps in that direction. Perhaps even more important are steps that families can take to provide the environment and encouragement that is so helpful in producing an educated population. The president's tax cuts have made the tax code more progressive, which also narrows the difference in take-home earnings.

Through education, hard work and entrepreneurship, there is great opportunity for Americans to improve their economic circumstances over their lifetimes. ... Those who invest in education increase dramatically the likelihood that they will enjoy these improvements in their standard of living. ...

Given the importance being given to education in explaining wage disparity, I would like to see a higher level of commitment from the administration to improving education at all levels than has been exhibited to date.

With regard to the claim that taxes are more progressive, see this recent report from the Center for Budget and Policy Priorities for a counterargument:

Recent Tax And Income Trends Among High-Income Taxpayers: Administration officials have consistently sought to portray the distribution of benefits from the 2001 and 2003 tax cuts as balanced or even progressive. Recently, for example, the Treasury Department released a ... fact sheet... The fact sheet makes two main points: that “the individual income tax is highly progressive ... higher income taxpayers pay most of the individual income tax...,” and that the burden these taxpayers bear has increased as a result of the tax cuts enacted under the Bush Administration.[1] These Administration claims are designed to counter arguments that the tax cuts enacted since 2001 are tilted to those at the top of the income scale. The claims, however, are misleading...

Update: Brad DeLong comments on the progressivity claim and on Greg Mankiw's response to the editorial in "Cue the Noisemakers."

Update: I should have linked this commentary by Paul Krugman on whether the returns to education explain the growing income gap, "Graduates and Oligarchs." Quoting, "But Mr. Bernanke did stumble at one point. Responding to a question ... about income inequality, he declared that "the most important factor" in rising inequality "is the rising skill premium, the increased return to education.""

The Value of Writing for the General Public

I have a lot of sympathy for Greg Mankiw's position about writing for the general public:

Greg Mankiw's Blog: E-mail of the Day: On The Optimal Use of My Time: I received this email this weekend:

Friday Cat Herding

Wow. Are we really this bad?:

Why academics make an unfit subject for management, by Lucy Kellaway, Financial Times: If I had to write down all the senior management positions I would hate to hold ... at the top of my list of undesirable jobs would be running ... any university, in particular a successful one. ... The reason is that academics, especially good ones, make employees from hell. .... I can think of seven things that make them entirely unsuited for such a part.

• They are very clever. This is not an advantage in most institutions as it means that they can think for themselves. (They may not actually be that clever, but they think they are - which may be worse.)
• Some have spectacularly low levels of emotional intelligence, which is often more important than IQ in getting things done.
• They are not team players, to put it mildly. Many are introverted. Moreover, the structure of university life means their colleagues (in most subjects save science) are their rivals.
• Criticism is a way of life. The mind of the academic is trained to pull holes in things. So when presented with a new initiative, they question it and deem it a waste of time as a matter of course.
• There is no line of authority. In a big company everyone sucks up to their bosses and agrees with them. In a university, there is less to be gained by brown-nosing, so disagreement prevails.
• They are complacent and have an interest in the status quo that has given them secure jobs and pensions.
• Because their status largely depends on their research, which may only be understood by a tiny number of people, insecurity, pettiness and bitchiness often result.

Krugman's Money Talks: When Education Doesn't Pay

Paul Krugman responds to comments on his column Graduates Versus Oligarchs:

When Education Doesn't Pay, by Paul Krugman, Money Talks, NY Times: ... Paul Krugman: Several people have asked whether the surge in incomes at the very top might be to a large extent a statistical illusion, due to lower marginal tax rates. The idea is that great fortunes went "underground" when top tax rates were high, and resurfaced when rates fell under Reagan and Bush.

It's a good question, and has been studied by economists. Let me give you a quick explanation of why I think it's a fairly minor factor. The kind of income we'd expect to see surging if wealth was hidden would be from capital — dividends, interest, etc. But the big gains have, in fact, come in high-level compensation — C.E.O. paychecks and such. In fact, the growth numbers in my article referred to wage and salary income.

Now, we can be reasonably sure that in 1970 the C.E.O. of General Motors wasn't receiving huge hidden compensation equal to several times his reported income. (C.E.O. compensation has gone from about 40 times average wages to about 400 times.) So the increase in incomes at the top is mainly a real phenomenon, not a story about tax avoidance.

One other point: a few people have asked whether there are graduates and graduates — whether serious tech degrees have paid off more than liberal arts or whatever. The answer is, not dramatically. Having an engineering degree has no more been a ticket to big income gains than being at the 90th percentile.

Paul Krugman: Graduates Versus Oligarchs

Paul Krugman on the 80-20 fallacy:

Graduates Versus Oligarchs, Rising Oligarchy, by Paul Krugman, Commentary, NY Times: Ben Bernanke's maiden Congressional testimony as chairman of the Federal Reserve was, everyone agrees, superb. ... But Mr. Bernanke did stumble at one point. Responding to a question ... about income inequality, he declared that "the most important factor" in rising inequality "is the rising skill premium, the increased return to education."

That's a fundamental misreading of what's happening.... What we're seeing isn't the rise of a fairly broad class of knowledge workers. Instead, we're seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite. I think of Mr. Bernanke's position ... as the 80-20 fallacy. It's the notion that the winners in our increasingly unequal society are a fairly large group ... the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization...

The truth is quite different. Highly educated workers have done better than those with less education, but ... real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year.

So who are the winners from rising inequality? ... A new research paper by Ian Dew-Becker and Robert Gordon ... gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only ... about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains.

But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that's not a misprint. Just to give you a sense of who we're talking about: ... the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726. The ... 99.99th percentile [is] probably well over $6 million a year. ...

The notion that it's all about returns to education suggests that nobody is to blame for rising inequality, that it's just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system — and better education is a value to which just about every politician in America pays at least lip service.

The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that's the real story.

Should we be worried about the increasingly oligarchic nature of American society? Yes ... Both history and modern experience tell us that highly unequal societies also tend to be highly corrupt. There's an arrow of causation that runs from diverging income trends to Jack Abramoff ...

And I'm with Alan Greenspan, who ... has repeatedly warned that growing inequality poses a threat to "democratic society." It may take some time before we muster the political will to counter that threat. But the first step toward doing something about inequality is to abandon the 80-20 fallacy. It's time to face up to the fact that rising inequality is driven by the giant income gains of a tiny elite, not the modest gains of college graduates. [Link to Dew-Becker and Gordon paper, includes comments from Ian Dew-Becker on the paper]

Previous (2/24) column: Paul Krugman:  Osama, Saddam and the Ports
Next (3/3) column: Paul Krugman: George the Unready

Egg-Head Hunting

China is making some progress in attracting quality academics to its universities, but the pace of change is slow:

China hunts abroad for academic talent, by Pallavi Aiyar, Atimes.com: ...[China] has ... turned its attention to transforming its universities into world-class institutions. "Our government realizes the connection between a nation's overall power and the quality of its higher education," said Dr Weiying Zhang, assistant president of Peking University. ... Chinese universities backed by massive injections of governmental funding are spending billions of dollars to attract top foreign-educated and overseas-born Chinese, ... and developing new programs taught in the international lingua franca - English...

Han Bing ... said [Beijing Normal University] hosts 30-40 scholars from leading Western universities annually. ... The positions are open to all nationalities, although cultural affinities and language requirements have meant that so far only ethnic Chinese have been recruited ... as full-time staff. ... At Peking University's Guanghua School of Management, ... full professors with PhDs from prestigious universities abroad can expect ... anywhere from $30,000 to $300,000 and up (depending on the ... prominence and seniority of the individual involved). This year the school recruited its first non-ethnic-Chinese faculty member, a Canadian national ... The ability to offer internationally competitive salaries is key to attracting quality academics, said Zhang. ...

As a result of its improved pay scales, the Guanghua school currently boasts some 50 "returned scholars" ... and more than half of the faculty hold foreign PhDs. ... In fact several ... research institutes at China's better universities have a minimum requirement of a foreign PhD for faculty members. ...[A]t Peking University..., Professor Feng Lu, recalled the Herculean efforts required to persuade quality academics to return to China a decade ago. In contrast, he said, there are now more than 50 applications for every vacancy advertised at the center. Examples of world-renowned academics choosing China as their new home abound. ... "For a world-class university, it's necessary to attract the best students and faculty internationally. ... we don't just want the best Chinese ..., but the best from around the world," said Zhang. ...

For him, one of the most significant reforms pioneered at Peking University ... [is that since] 2003, professors ... are no longer promoted on the basis of seniority but with an eye to their research and publication records. If a new lecturer cannot make it to associate professor within six years, he or she is asked to leave. "This was the only way to change the orientation of our faculty towards academic research," explained Zhang.

The combined results of these efforts are already paying off. Despite the common perception that Indian higher education, with such renowned institutions as the Indian Institute of Technology and the Indian Institute of Management, is superior to its Chinese counterpart, China's universities in fact beat India's in almost every international ranking. ...

However, China still has a considerable distance to go before its aspirations to create truly world-class universities become a reality. According to the SJTU rankings, the United States had more than 50 universities in the top 100, compared with zero for China. ... Thus, despite having the funds available to make the cream of international academia fairly lucrative offers, even China's leading universities have so far only been able to recruit China-born or ethnic-Chinese scholars in any significant numbers. "We have been able to improve our hardware considerably," said BNU's Han. "But as is always the case in China, the software takes longer."

iLecture

Another follow up, this time to Technology and Class Attendance:

Apple Offers College Lectures Via Podcasts, AP/NYT: In its latest move to broaden its iPod and iTunes franchises, Apple Computer Inc. has introduced ''iTunes U,'' a nationwide expansion of a service that makes course lectures and other educational materials accessible via Apple's iTunes software. The company ... had been working with six universities on the pilot project for more than a year and expanded the educational program this week, inviting other universities to sign up. ... Apple's service offers universities a customized version of the iTunes software, allowing schools to post podcasts, audio books or video content on their iTunes-affiliated Web sites. ...

I *guess* this is a good thing...

Technology and Class Attendance

Guess what? If you lower the cost of missing class, less students show up. This article notes that when more material is posted for classes, attendance is lower. I've noticed the same thing. There is a very clear association between how much I post and class attendance and because of this, I have stopped posting as much review material. I thought it gave students a false sense of security. They would skip class thinking they could make up what was lost with web-based material later, then find out when the test time arrives that the posted material is not an effective substitute for coming to class, or that they have waited too long to get started making up missed material. That's when I start getting frantic email. It appears to me that it is the students on the margin who most easily fall victim to this temptation.

On the other side, though, are the students who make effective use of the posted material. They show up to class as always, and use what I post as a complement, not a substitute, to lectures. I am reluctant to allow class policy to be dictated by the students who are more interested in obtaining a piece of paper than learning, so I am rethinking my policy about posting material. I don't think my classes should be less effective for the best students just because other students cannot resist the temptation to sleep in on a cold and rainy morning knowing that lecture materials will be posted to make the sleep less costly. This isn't high school where it's the state's job to make sure every student is educated. In college, students must begin learning to take responsibility for their own education and I should not let some students to be held back in an attempt to force those at the other end of the spectrum to come to class, read, ask questions, and learn the material. Still, it's hard not to structure incentives so as to get the most out of every student rather than just the subset who are most interested in learning the course material:

Skip class? You've got online pal, Detroit Free News/LA Times, by Stuart Silverstein:  Skipping classes, particularly big lectures where an absence can go undetected, is a tradition among college undergraduates who party late or swap notes with friends. These days, professors are witnessing a spurt in absenteeism as an unintended consequence of adopting technologies originally envisioned as learning aids.

One of Azevedo's Classes

Last semester, Americ Azevedo's class on "Introduction to Computers" at the University of California, Berkeley, featured some of the hottest options in educational technology. By visiting the course's Web sites, the 200 students could download audio recordings or watch digital videos of the lectures, as well as read the instructor's lecture notes and participate in online discussions.

But there was one problem: So many of the undergraduates relied on the technology that, at times, only 20 or so actually showed up for class. "It was demoralizing," Azevedo said. "Getting students out of their media bubble to be here is getting progressively harder."

Even as many academics embrace electronic innovations, others are pushing back. To deter no-shows, professors are reverting to low-tech tactics such as giving more surprise quizzes or slashing online offerings.

"Too much online instruction is a bad thing," said Terre Allen, a communication studies scholar at California State University, Long Beach.

Last term, Allen posted extensive lecture notes online for her undergraduate course, "Language and Behavior." One goal was to relieve students of the burden of scribbling notes, freeing them to focus on the lectures' substance. Yet the result, Allen said, was that only about one-third of her 154 students showed up for most of the lectures. In the past, when Allen put less material online, 60 percent to 70 percent of students typically would attend. ...

Kelly A. Rocca, an assistant professor of communication at St. John's University in New York and one of the few scholars who has recently studied American college absenteeism, said she suspects that skipping class has reached an all-time high because of off-campus jobs and reliance on technology. To combat ditching in her own classes, Rocca refuses to post notes online. With undergraduates, she said, "the more reasons you give them not to come to class, the less likely they are to come." ...

Other research supports the common-sense belief that skipping class hurts a student's grades. Lee Ohanian, a UCLA economics professor, said he notices that frequent skippers often "are the ones who are doing just enough to get by. The ones who are getting the A's are in the front row at every lecture." Ohanian said "too much technology really leads to a passive learning environment" and spurs absenteeism. He has cut back on posting lecture materials online and now provides extensive notes only for the most complicated topics.

Despite concerns about absenteeism, schools increasingly are experimenting with ways to let students watch or listen to lectures on their computers or digital music players, ... Likewise, online, or "distance," education programs -- premised on students' not needing to be in class -- are growing.

Advocates of the new technologies say they give schools an effective, low-cost way to deliver instruction while freeing students to review material at their own pace. The online options also let students participate in discussions electronically and allow instructors the flexibility to make quick changes.

Update: Brief follow up at iLecture.

Spying on Professors

This is a post from my daughter, Amy, at Flash Report on the recent story about students spying on their professors at UCLA:

Weighing in on the UCLA Story, Flash Report, by Amy Thoma

Money or Morals?

Last time the question of why college presidents have fallen silent came up, I noted that the role of a college president today is largely one of fund raising and thus it was no mystery why they would be unwilling to risk offending potential donors by speaking out on controversial issues. This commentary by Margaret A. McKenna, president of Lesley University, explores the question further:

The silencing of college presidents, by Margaret A. McKenna, Boston Globe: When I became president of Lesley University 20 years ago, I was attracted to the college because of its mission and beliefs that individuals can and should make a difference. ... I ... believed that we had an opportunity, in fact a responsibility, to make the world a better place. I knew, though may have underestimated, the demands of a university presidency: the pressures of fund-raising and enrollment numbers, the toll on personal time, and the economic challenges of tuition dependent institutions. ...

In the 19th century, presidents taught their college's course in moral philosophy and ethics. Moral leadership was the centerpiece of the college president's role. In the 20th century, that tradition began to ebb, but some college presidents still provided very public models of moral leadership. ... Much has changed in a few decades. The president's role as fund-raiser has grown. The university system and its expectations are stacked against any president providing the kind of public moral leadership that once characterized our profession. Too much risk is involved. Prospective students, donors, trustees, and alumni could be offended. Faculty may fear that a president's opinion too forcefully expressed might impinge on academic freedom.

And since 9/11, dissent of almost any kind has been labeled as unpatriotic, and even reasoned debate on hot button social issues is viewed as dangerously controversial. Thus, while many of my colleagues will state positions on issues clearly affecting their campuses, like financial aid, they are loath to venture an opinion outside of academe. Who can blame them? ... But I wonder what it would take for more of us to speak out?

We will defend our students' right to financial aid, but what about basic human rights like those trampled at Guantanamo and Abu Ghraib? We can respond to college students displaced by Katrina, but are we willing to speak on behalf of children of undocumented immigrants? We might write our congressman to protect charitable deductions for nonprofits, but what of tax reform that disproportionately aids the rich and ignores the poor? We are eloquent advocates of academic freedom, but what of freedom to communicate free from government surveillance?

The country is sorely in need of new voices of courage and conviction. Thank God for John McCain, Ted Kennedy, and more recently John Murtha. Others who speak from less formal roles: George Will, Dan Schorr, Cindy Sheehan, Bono, and Pat Buchanan on his more rational days. Whether you agree with them or not, you can believe they say what they mean and mean what they say. Regardless of ideological position, we need more voices in public dialogue like that.

The punditry of Sunday morning talk shows is not an answer. On the other hand, I am convinced moral leaders can be found at all levels of society. Their formal roles matter less than the power of their ideas, vision, and voices. But university presidents, in particular, have a unique historical tradition, and strong educational reason, to reassert their voices in their historical role of moral leadership.

Many college students are increasingly cynical about politics. They are willing to serve as volunteers, but less willing to be part of the political process. I believe that if we want our students to be engaged in civic life, to be leaders, to speak out on issues, we need to provide them with the models for doing so. ...

Where the Boys Aren't

From Andrew Leigh of Imagining Australia:

Imagining Australia, Sororities Up, Frats Down: A fascinating paper by Claudia Goldin and Larry Katz looks at why women outnumber men in US universities (as they do in Australia). For every man graduating from a 4-year college in the US, 1.35 women graduate.* Their abstract:

Women are currently the majority college students and those receiving a B.A., but were 35 percent of undergraduates in 1960. Although the relative increase progressed steadily from the 1950s large changes occurred in the late 1960s and 1970s. Using three longitudinal data sets of high school graduates in 1957, 1972, and 1992 we show that the new gender gap in college was produced in several stages. From 1957 to 1972 high school girls increased their college going, however their high school course taking changed only slightly. But from 1972 to 1992 girls took substantially more math and science courses and showed greatly improved math and reading test scores relative to boys. These changes can account for one-third to one-half of the increase in women’s college completion rate relative to men’s. The expectations of young women about their future work were rapidly brought in line with reality between 1968 and 1979, enabling them to invest more appropriately in skills.

The most interesting fact-ette:

In all three surveys girls achieved higher grades in high school than did boys. In the WLS (graduating 1957) the high school rank of the median girl was 21 percentile points above the median boy. In the NLS (graduating 1972) the median girl was 16 percentile points above the median boy and the difference was almost 15 percentile points in the NELS (graduating [from high school] 1992).

* Apparently in some colleges in the US south, the ratio is now nearly 2 women for every man, which makes one wonder whether soon men will start attending university just so they can find a high-flying mate.

Some of the difference between male and female attendance can also be explained by a much larger fraction of women from low income homes attending college than low income men. As this report notes:

Black, Hispanic, and low-income students have lagged behind their peers for years. ... the growing gender gap within these groups has been well-documented ... There is little evidence to suggest that white, middle-class males are falling behind their female peers.

Here are some data from the report. The figures are a bit dated, and it is only one of many statistics examined, but it gives a sense of the findings:

I wonder if income level and college enrollment are related similarly in Australia?

Why Have University Presidents Fallen Silent?

The question in this editorial from The Christian Science Monitor is why university presidents don't speak out as often or as loudly as they once did. My experience suggests that the answer given, that university presidents now devote much of their time to fundraising is part of it, and I agree that fundraising has come to dominate their efforts far more than in the past. But I don't think lack of time is the major factor. Because fundraising has become so important, speaking out can offend potential donors and is therefore best avoided in the interests of the university. Even at the Department level, we've had donors threaten to pull donations due to editorials that were written by Department members and that makes Department members think twice before taking public positions that might be controversial, particularly since travel, visiting speakers, and other research activities have become increasingly dependent upon donated money. Better not to rock the boat. As universities become more dependent upon the private sector for funding, the ability to speak freely on important issues is reduced:

Where are the voices of college presidents?, by John Merrow, CS Monitor: Here's a quiz for you. Name the presidents of any three of America's 4,000-plus colleges and universities. Odds are most readers flunked that quiz, but it wouldn't be fair to take points off anyone's grade. How could the public know the names of higher education leaders, who are largely silent on the great issues of the day? Today's presidents only get noticed if they say something outrageous (Harvard's Lawrence Summers's comments about women and science), live too lavishly (former American University President Benjamin Ladner), or make millions (Lynn University's Donald Ross).

It hasn't always been this way. Father Theodore Hesburgh of Notre Dame ... declared, "Anyone who refuses to speak out off campus does not deserve to be listened to on campus." Many 20th-century university presidents also served as ambassadors and heads of major national commissions. Think Clark Kerr of the University of California, Jill Kerr Conway of Smith, Kingman Brewster of Yale, and Robert Hutchins and Edward Levi of the University of Chicago. Reporters knew to call them for opinions on the burning issues of the day.

I spent much of the past three years reporting about higher education and didn't find their modern-day equivalents. Presidents I met said they devoted much of their time to fundraising, often to build dormitories with wi-fi, athletic facilities with climbing walls, and stadiums with luxury boxes. The Chronicle of Higher Education recently released its own survey of university presidents, and its results confirm that observation. Five of the six most pressing issues have to do with money, and the sixth - retaining students - is only marginally related to teaching and learning.

Perhaps because of their preoccupation with dollars, today's college presidents are not educating the rest of us on issues that matter. Take the issue of intelligent design. Only three university presidents have spoken out against treating intelligent design as science. ... [T]he overwhelming silence on this topic, among others, shows just how far higher education has slipped from its pedestal. Greater leadership in public debate on critical issues is what's needed to stop academia's declining prestige, not a fixation on the bottom dollar.

FedStuff: Santomero to Step Down, Auto Parts, Education, and ATMs

From the Philadelphia Fed web site:

Philadelphia Fed President to Leave Bank Next Year: Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, announced that he will leave his position as president effective March 31, 2006 . Dr. Santomero has headed the Philadelphia Fed for nearly six years, and is completing his year as a voting member of the Federal Open Market Committee. “... The president’s choice of Ben Bernanke is an excellent one, and the Federal Reserve is in good hands. However, if I am to move on to one more new career, now is the opportune time to make the transition,” Santomero said. ...

And, as Bloomberg notes, Sanotmero was an advocate of explicit inflation targeting so his departure may change the degree of support for moving in this direction depending, of course, on the views of his replacement, and he is also relatively hawkish on inflation:

Santomero, Philadelphia Fed Bank President, to Step Down on March 31, Bloomberg: Federal Reserve Bank of Philadelphia President Anthony Santomero will leave his job March 31 ... The departure means Ben S. Bernanke ... will lose an ally in his effort to set a specific U.S. inflation target. ... "Santomero was an important supporter of inflation targeting,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi in New York. ... Santomero stressed the need for the Fed to raise rates to contain inflation in speeches this year. "It is incumbent upon the Fed to make every effort to keep these price pressures well- contained,'' he said in June remarks in Washington. ... "He took a consistently hard stance against inflation,'' said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. ... Of the 12 regional Fed presidents, Santomero is among the six who support creating some form of a numerical description of the Fed's low-inflation mandate. Bernanke backs the idea ...

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From the Chicago Fed:

Chicago Fed Letter A newsletter featuring an essay on economic policy issues of regional or national interest. January 2006

Competition and trade in the U.S. auto parts sector by Thomas H. Klier and James M. Rubenstein: Exports of U.S. made auto parts have stalled in recent years, while import levels of auto parts have continued to increase. The authors detail the magnitude and destination of U.S. imports and exports of specific auto parts in order to assess the challenges facing U.S. parts suppliers. (PDF,106KB)

Higher education and economic growth by Richard H. Mattoon: The future of higher education and its relationship to economic growth were the focus of a one-day conference at the Chicago Fed on November 2, 2005. Cosponsored by the bank, the Committee on Institutional Cooperation, and the Midwestern Higher Education Compact, the event brought together over 100 academic, business, and government leaders. (PDF,48KB)

Higher education and economic growth: A conference report by Richard H. Mattoon: This is an expanded summary of the conference on higher education that was held at the Federal Reserve Bank of Chicago on November 2, 2005. This edition is only available online. (PDF,69KB)

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From the San Francisco Fed:

FRBSF Economic Letter

Bank ATMs and ATM Surcharges This Letter reports on recent research into the proliferation of ATMs and the pricing schemes that accompany them, which sheds some light on how banks compete against each other in the current environment. — Gautam Gowrisankaran & John Krainer, Economic Letter 2005-36 (December 16)

No Lender Left Behind

Let's transfer a bunch of money from the government to lenders as part of a student loan program and when evidence of something potentially better for students comes along that might reduce these transfers, hide it:

Robbing Joe College to Pay Sallie Mae, by Anya Kamenetz, commentary, NY Times: ... The federal student aid system fails students, but it does a great job of delivering profits to private lenders... When it created the loan program, Congress assumed that banks would not lend to young people without extensive guarantees and incentives. So they guaranteed a certain rate of return on student loans, made up their losses on defaulters, created a secondary market for student loans by chartering ... Sallie Mae ... Student lending has grown into a highly profitable and low-default market, yet these special privileges persist. Sallie Mae, the private company that makes, buys and sells the most student loans, boasted the second-highest return on revenue in the 2005 Fortune 500.

Sallie Mae also happens to be the largest contributor, by far, to members of the House Education Committee. ...[T]he committee chairman alone, John Boehner of Ohio, received $172,000 ... in 2003 and 2004. It's thus no surprise that lawmakers are apt to protect lenders and not students. ...But ... why not cut off subsidies to banks and give that money to needy students? One way to do that is to expand a program ... in which the government makes loans directly. A recent Government Accountability Office report showed that direct loans cost the government one-fifth as much ... Mr. Boehner, however, kept the report under wraps for 30 days, and it was released just hours before the House committee vote. ... [T]he aid program could save $60 billion over the next decade by switching entirely to direct loans - enough for almost a 50 percent increase in Pell Grant money.

A group of students has also proposed a National Tuition Endowment, which would preserve an estimated $30 billion for need-based grants by cutting loan subsidies and finally closing an infamous loophole that has lenders collecting 9.5 percent interest from the government on certain loans. Yet Mr. Boehner is heading in a different direction. He told an audience of commercial student lenders earlier this month that "I've got enough rabbits up my sleeve" to make them happier with the bill. ...

There was a recent rule change allowing student loans to be collected from Social Security payments. If personal irresponsibility causes an individual to default on a student loan, and if fiscal irresponsibility causes the government to renege and reduce Social Security, health care, or other obligations by the same amount, what then? Shall we just call it even? More seriously, as the article notes in a part that was cut, a recent bill cut 14 billion from the student loan program over the next six years. The justification given was that it came from corporate subsidies, not loans. Two things, first, that shows how large the excess profits to lenders have been, and second, why not use the money gleaned from the rule change to increase the amount available for grants and loans? It's needed.

I Hear You Knocking, But You Can't Come In

Give me your tired, your poor, your huddled masses yearning for a degree:

Imported Brains, Editorial, NY Times: On one side, there's the risk: one of the plotters in the first World Trade Center bombing was on a student visa. On the other, there's the benefit: last year, 565,039 foreign students contributed about $13.3 billion to the United States economy. For every 100 foreign students who got American Ph.D.'s in engineering or the physical sciences, ... the United States got 62 patent applications. [T]he students who returned home ... probably took with them warm feelings toward America, democracy and free enterprise. ... International students play an enormously important role in American science and business. That's why it is disturbing that for the second year in a row, the Institute of International Education has reported a drop in the number of foreign students on American campuses. Clearly, the tightening of security and visa rules since 9/11 is part of the problem. ... But difficulty in getting visas is not the whole story. The fact is that the competition for foreign students has become far more intense. ...American campuses ... have been steadily losing market share for years, especially to Canada, Australia and Europe. Now the European Union is considering offering citizenship to foreign students who complete their doctorates at European universities. That's a powerful incentive ... Indeed, the competition for brains and ideas is where the battle for global influence should be waged. ... Nobody denies the importance of barring entry to terrorists, but nobody should be oblivious to the danger of excluding another Einstein.

Education, Income, and Good Job Growth

Posts at this site, from Kash at Angry Bear, and many others have been talking about the value of education in the emerging global marketplace, often to a less than fully receptive audience. At the risk of overdoing this topic and of diverting attention from the health care discussion below which I'd rather not do just yet, here is a follow up to two recent posts from Kash on Education and Earnings and More Skills Needed. First, California is often a trend-setter, but the trends are not always good:

California's going to get a shocking education, by Patrick M. Callan, Commentary, LA Times: ...If current education policies continue unchanged, the California workforce of 2020 is going to be less educated than today's, according to a recent report ... and the state's per-capita income will drop more substantially than elsewhere in the country. The transformation will occur as baby boomers, the most highly educated generation in U.S. history, retire. Across the country they will be replaced by a growing population of young workers from the nation's least-educated minority groups. The share of the workforce that is college educated will shrink accordingly, losing the U.S. much of its advantage in the global marketplace. The problem is national, but in California it will be particularly severe. ... The Latino population, by far the least educated of any of the state's large minority groups, is expanding dramatically. By 2020, Latinos will make up as large a share of the state's working-age population ... as whites... This is a seismic shift; in 1990, only 22% of working-age adults were Latino and 61% were white. ... [T]he state is making only limited progress with its current students. ... the gaps between young Latinos ... and young whites, blacks and Asian Americans remain large. To some extent, the problem may be one of inadequate preparation in California's schools. ... But preparation is not the whole story. The expense of higher education can also be prohibitive. California provides more low-cost college options than most states and has recently increased ... need-based financial aid. But for the poorest 40% of California families, the cost each year of sending a child to community college still amounts to more than a third of the average family income. The cost of sending a child to a public four-year college, even after figuring in financial aid, amounts to nearly half of such a family's income. If California does nothing more to raise the education level of its residents, and particularly of its largest, fastest-growing and least-educated minority group, it can expect to lose economic ground against the world and other states. ...

Next, here's more from the St. Louis Fed:

Employment Growth in America
What Determines Good Jobs?

Employment growth is one of the most fundamental aspects of a strong economy. Yet not all jobs are created equal. Some pay generously and offer desirable working conditions, while others do not. A study by Federal Reserve Bank of St. Louis economist Christopher H. Wheeler examined the growth of high-paying (“good”) and low-paying (“bad”) jobs across a sample of 206 metropolitan areas in the United States. This study suggests that ... [c]ities that experience rapid growth in high-wage employment also tend to see increasing incomes throughout the entire labor market, not just among those who happen to hold high-paying jobs...

Does Education Matter? One of the fundamental sources of good job growth is an educated labor force. Within the past three decades, the demand for highly educated workers has grown dramatically in the United States. In 1980, the average proportion of workers across 200 industries with some education at the college level was 32 percent. By 2000, it had risen to 51 percent. In fact, no industry saw its proportion of college-educated workers decrease over this period. At the same time, high-paying jobs also tend to have a particularly strong demand for college-educated workers. Among the top 25 percent of jobs in the sample, the average proportion of workers with a bachelor’s degree rose from 18 percent in 1980 to 36 percent in 2000. There is also a strong positive association between an industry’s average hourly rate of pay and the fraction of its workers with a bachelor’s degree. ... Why is the general level of education so important? ... Not only is education associated with higher earnings for individuals, but as the general level of education within a city rises, the average labor earnings of all workers tend to rise. An additional benefit of a more-educated work force concerns the potential for future job growth. The level of education among a city’s population is strongly associated with subsequent rates of growth among high-paying sectors. ... [C]ities with more-educated populations tend to see the ratio of good to bad jobs increase over time...

Here are the top 5 and bottom 5 industries identified in the article:

Jobs in the U.S.: Average Hourly Pay and Total Employment

2000 Rank

Industry

Average Hourly Wage ($)

Employment

1	Metal Mining	38.61	22,813
2	Security, Commodity Brokerage and Investment Companies	36.26	991,548
3	Business Management and Consulting Services	32.83	825,480
4	Railroads	29.73	291,944
5	Computer and Data Processing Services	29.70	1,385,009
192	Barber Shops	12.73	44,509
193	Retail Florists	12.57	152,538
194	Gasoline Service Stations	12.52	392,666
195	Eating and Drinking Places	12.06	5,151,237
196	Bowling Alleys, Billiard and Pool Parlors	12.02	49,759

This article was adapted from “Employment Growth in America” ... by Christopher H. Wheeler ... published ... in July 2005.

Here's a link to the July 2005 paper. It has quite a bit more information on the topic of growth in good/bad jobs for those who want to follow up.

Does the U.S. Have a 'Skills Gap'?

This report surprised me:

US manufacturing ‘undermined by skills gap’, Financial Times: America’s ability to compete in the global economy is being undermined by a “serious shortage”, of skilled workers in manufacturing industries, according to a survey released on Tuesday. More than 80 per cent of US manufacturers are now experiencing a shortage of qualified workers, which is taking an increasingly negative toll on their ability to compete with global rivals, says the report by the National Association of Manufacturers, the Manufacturing Institute and Deloitte Consulting LLP. “The pain is most acute on the front line, where 90 per cent report a moderate to severe shortage of qualified skilled production employees including machinists, operators, craft workers, distributors and technicians... Engineers and scientists were also in short supply, with 65 per cent of respondents reporting current deficiencies.

The survey exposes “a widening gap between the dwindling supply of skilled workers in America and the growing technical demands of the modern manufacturing workplace,” said John Engler, NAM president. “It is essential that America close this skills gap if we are to maintain our edge in the global marketplace and remain the world’s leader in innovation.” Mr Engler said both the public and private sectors had to take “urgent action“ to improve skills and competitiveness. ... If manufacturers are to remain competitive, the issues of education and training reform must be given at least as much attention as other top business concerns like trade, taxes, energy and regulatory reform.”

Manufacturers face the additional challenge of poor skill levels among current employees, according to the report. The skills gap threatens America’s ability to compete “in today’s fast-paced and increasingly demanding” global economy. “It is emerging as our nation’s most pressing business issue,” stated Manufacturing Institute President Jerry Jasinowski. “Nearly three out of four manufacturers surveyed believe that a high performance workforce is the most important driver of future business success. “

I'll say it again. Education is a key factor in our ability to compete in the emerging global marketplace.

Cleveland Fed's Pianalto: Education is a Key Factor for Economic Flexibility

Sandra Pianalto, president of the Cleveland Fed, discusses how to minimize the negative consequences of structural change. For example, the Cleveland Fed District has experienced a decline in manufacturing activity and other changes related to globalization. How can the region overcome this decline? The key, according to president Pianalto, is innovation. And what is the key to innovation? Continuing a recent theme from Fed officials (e.g., Chicago Fed), and a recurring theme at this site, the key is education. With all the recent post on this topic, this may be a bit repetitive, but it's an important topic, I've been trying to document most Fed speeches by governors and presidents, and the it gives an indication of how policy makers are thinking about this problem:

The Role of Innovation in Economic Transformation, by Sandra Pianalto, Cleveland Fed President, November 9, 2005: At the Federal Reserve Bank of Cleveland, we spend a lot of time thinking about what factors drive economic growth and prosperity. We have found that innovation is one of the key factors in creating the kind of economic conditions that will benefit all of our citizens. Today, I would like to share my thoughts on the role of innovation in economic transformation. ...[I]n Northeast Ohio ... After a century of relying on the heaviest types of traditional industry — such as coal, steel, autos, and rubber — we have been deeply affected by global trends including rapidly changing technology and increased international trade. As I am sure you know, these trends have led to a decline in manufacturing jobs and a growing wage differential between high-school and college graduates. ... Economists call this process “creative destruction.” It is a natural part of our economic development... Economic change is as relentless as the tides, and this change will direct resources to wherever they are most productive. ... [O]ur region’s transition does not necessarily mean we have to live in a world with downsized dreams, or less productive industry, or less prosperous communities. ... Every sector of society — public and private; for-profit and non-profit; philanthropic and academic — can participate in fostering a growing regional economy in the future. The key to our shared success, I am convinced, will be our ability to foster and sustain innovation. ... I don’t think it is any exaggeration to say that innovation is the mainspring for economic renewal. ... The task now... is to educate a new generation of inventors and entrepreneurs, to encourage their creativity, to invest in their potential, and to promote their access to worldwide markets. ... To create a dynamic economy that promotes innovation in Northeast Ohio, we must find a way to do a few important things well (bullets added for emphasis):

• We must fund academic research...
• [W]e must support business startups to move innovations from the labs to production sites.
• We must build on our existing strengths — using the industrial knowledge and workplace skills from older industries and applying them to new tasks. ...
• But there is one more important thing that we need to do well, and that is educating our workforce for the future. In a global economy that grows more competitive every day, the words “education” and “opportunity” are becoming increasingly synonymous. Creating a civic culture that supports education is the most promising pathway to creating a base for innovation. ... Investments in education today ... can generate dramatic new productivity growth tomorrow. The fact is that Northeast Ohio lags behind many other regions of the country in levels of educational attainment, and nowhere is that more evident than in our large cities.

Making effective investments in our people must be among our foremost priorities. Investments, after all, come in many forms. ... As we look ahead, our prospects depend on our commitment to invest in intellectual capital: the knowledge base of our students, the technological skills of our workers, and the imaginative power of our inventors. ... Instead of resisting change, we must prepare for new opportunities by rethinking our approaches, retraining our workforce, and investing in new initiatives. ...

"Economic change is as relentless as the tides." As I've said before many times here, we will not stop globalization, the economic tide will move where it wants to move - but we can do a whole lot better helping those who, through no fault of their own, have the costs of globalization thrust upon them, and a key component of that effort is education.

Chicago Fed President Moskow: The Future of Higher Education

These remarks by Chicago Fed president Michael H. Moskow on the fuure of higher education provide a follow up to this post:

Higher Education at a Crossroad, by Michael H. Moskow, Chicago Fed President: ...Let me begin by offering my perspective on the value of higher education to our economy. At various points in my life I have been a student, a university professor, a college trustee, and an employer who relies on highly educated workers to help run a complex organization. As both an employer and an economist, it is clear to me that the relationship between education, productivity, and economic growth has never been more closely linked. While states and regions once prospered based on an abundance of physical capital and natural resources, today the quality of a region's human capital is paramount. This feature is particularly true for regions such as the Midwest, where our economy continues to restructure from manufacturing to services and high technology industries. These growing industries increasingly require college graduates to successfully compete in a global economy. Even in today's manufacturing firms, higher level skills are required, which mandates that workers obtain an education beyond the high school level.

Despite this recognition, we are at an inflection point. Enrollment in college in the U.S. is at a record level and expected to climb, as students and their parents recognize the very high returns to education ... However, financial pressures on colleges have also mounted. For public institutions, state support has eroded. As state spending pressures continue to rise for elementary and secondary education, Medicaid, and prisons, less is available for higher education. In response, universities today are increasingly forced to rely on their own resources to make budgets balance. But this can restrict access, because schools must often dip into endowments and resort to aggressive tuition hikes to close the gap. It's a Hobson's choice. If the school is concerned with maintaining academic quality, large tuition increases are often the best option, but in doing so access for students may be limited. If on the other hand the university limits tuition increases, it is often forced to economize and offer reduced services, which can jeopardize quality through large classes and the use of part-time faculty. ...

How can universities navigate these challenges and flourish? ... [U]niversities have been unable to maintain the implicit "social compact" ... based on a belief that education was largely a public good and, as such, government support was warranted. This notion has eroded over time. Today, many argue that higher education is a private good whose benefits primarily accrue to the student who is able to ... achieve a more satisfying quality of life and often significantly higher wages. This more market-driven notion suggests that higher education is an investment in an individual's human capital that has limited public spillovers. Therefore, it should be primarily financed by the individual. I believe for universities to flourish, they need to revisit this "social compact" and make a clearer case for the public good content of education. In order to do this, universities will need to be more transparent in their operations so that the public can have a better sense of what the value of the institution is to society. ... Polls indicate that the public ... often does not understand the return to society generated from the use of public funds for university research. In sum, universities need to become better educators of the general public and marketers of their product if they hope to attract greater tax support. ... The historic and increasing importance of higher education to our economic well being makes this a policy area where we must succeed. ...

Self-Selection Bias

There are 80 students in one of my classes. I passed back an exam today:

Mean score for the 63 students present in class today: 78.2
Mean score for the 17 students absent from class today: 63.3

What a surprise. Many of those who weren't there today will ask how they could do better. Uh, start by showing up and we'll go from there. I like this too from Hypothetical Bias. [Sorry. I needed to get that out. Back to work...]