Educational Signaling and Aggregate Productivity

One of Tyler Cowen’s readers writes,

Traditional productivity forecast research tends to assume the wage premium is entirely human capital.
[but] If sheepskin effects are purely relative status effects, then the impact on total output and income should be zero, right?

In a cross section, workers with more years of schooling will have higher wages. If you take this as an indicator of productivity differences, then in a time series in which years of schooling increase, you will predict higher productivity as these more-schooled workers enter the labor force. However, if education is only a signal of productivity and not a causal factor in productivity, then what?

Suppose that education produces zero useful work skills, and all useful skills are learned on the job. However, the workers with the best ability to learn on the job also are good at completing school. What does it mean when over time the number of workers with more education goes up? If it means that the pool of workers is getting better in terms of ability to learn on the job, then productivity should go up. If it means that more low-ability workers are somehow completing more years of schooling, then productivity should not go up at all.

Continuing with this scenario, my intuition is that the salary premium for highly-educated workers should fall, other things equal. However, in a time series, other things are not equal. For example, the technology may be changing so as to increase the value of high-ability workers. In that case, the wage premium for the high-ability educated workers could rise while that of the low-ability educated workers could fall.

Even though this scenario is extreme (education produces useful work skills in some cases), I think it may be approximately correct. In that case, the average wage premium for highly-educated workers overstates the marginal productivity premium of additional highly-educated workers over time.

In a Caplanian world, workers who do not complete a lot of schooling send an adverse signal. However, completing a lot of schooling is only a necessary condition for convincing employers that you are trainable. It is not sufficient, and firms use additional screening devices to distinguish among workers with equal numbers of years of schooling. The econometrician does not use those screening devices, and the econometrician ends up lumping together workers with different levels of ability in a way that firms do not. The firm, unlike the econometrician, sees through the worthless college degree in ____ studies. The econometrician is fooled into thinking that putting more kids through college will raise average productivity. The firm knows otherwise.

An Economy is not a Business

Don Boudreaux writes,

Samuelson here, like many noneconomists, fell victim to the fallacy of composition. Wars that make certain farmers and industrialists (and their workers and suppliers) more prosperous do not thereby make society more prosperous. What is true for some in this case is emphatically not true for the group.

I have pointed out that the intuitive appeal of Keynesian economics rests on the idea that the economy is a business. If a business had more demand, it probably would hire more workers. So you might think that if an economy has unemployment, it must need more demand. In fact, the point of PSST is that unemployment is a problem of not knowing which patterns of specialization and trade are sustainable. It is an entrepreneurial discovery problem, not a demand problem.

The Coordination Problem and Winner Cities

A commenter writes,

[migration of firms to small cities is inhibited by] Insufficient maturity of the coordination mechanisms – Maybe tomorrow’s equivalent of the free-state project/charter cities could be a proper linked in group where people can quite literally call out for all sorts of talent that they want in a city. This group could take over small towns or build new cities on empty land with finance coordinated with dominant assurance contracts enforced by blockchain like trustless/minimal trust mechanisms. All of these mechanisms are still immature. Maybe someday when the costs of the bay area really go up, the next big tech firm could try this.

Competing with San Francisco or New York for talented people is like trying to compete with Google in search or Facebook in social networking. In fact, it is more difficult, because the coordination problem is more subtle.

For instance, if you wanted to lure me to new city, you would need to insure that there are Israeli folk dance sessions. That requires coordinating enough dancers to move there. But prior to that, it requires that you know that this is an issue for me. And, of course, to get those dancers, you have to deal with their primary considerations, which might not be dancing.

Also, to get me to move, you need to persuade my wife. And she has her own considerations.

Established big cities have “solved” these coordination problems through a spontaneous order. You can think of them as overlapping networks of coordination. They attract Jane with a particular job opportunity, John with a particular amenity, and someone else with the opportunity to meet John and Jane.

The Felons Among Us

Nicholas Eberstadt writes,

Maybe 90 percent of all sentenced felons today are out of confinement and living more or less among us.

…rough arithmetic suggests that about 17 million men in our general population have a felony conviction somewhere in their CV. That works out to one of every eight adult males in America today.

Read the entire essay, which paints a very dark picture of conditions in this country. It strikes me as the most important magazine piece that I have seen so far this year.

Shorter Version of Tyler Cowen’s New Book

From one of my comenters.

the chief anti-libertarian human tendency is the wish to minimize risk by distributing it which leads to all the “too big to fail” and social security and regulatory boondoggles. The bigger and richer the society the easier it is to fulfill this wish at least in the short-medium run

This sounds like the problem of the “complacent class,” as reviewed by Walter Russell Mead or Edward Luce.

The Null Hypothesis in Education, Restated

By request. I probably should look up earlier statements before writing this, but I hope I am consistent. Consider an education intervention and a set of tests that it must pass. The intervention could be “more spending” or “method X used in the classroom” or “longer school days” or “charter schools” or what have you.

1. It should show a meaningful difference under experimental conditions, meaning that selection bias is eliminated.

2. The difference should persist, rather than fade out. If you show a difference in first grade but by third grade or fifth grade the experimental group is on on the same level as the control group, then there is fade-out.

3. The results should be replicated. One experiment that works one time does not count.

4. The intervention should be scalable. The intervention does not depend on a uniquely gifted teacher.

The Null Hypothesis is that no intervention passes all four tests.

My Thoughts on Cost Disease

Scott Alexander writes

Any explanation of the form “administrative bloat” or “inefficiency” has to explain why non-bloated alternatives don’t pop up or become popular. I’m sure the CEO of Ford would love to just stop doing his job and approve every single funding request that passes his desk and pay for it by jacking up the price of cars, but at some point if he did that too much we’d all just buy Toyotas instead. Although there are some barriers to competition in the hospital market, there are fewer such barriers in the college, private school, and ambulatory clinic market. Why hasn’t competition discouraged administrative bloat here the same way it does in other industries?

1. At any given time, you will have sectors where demand is growing faster than productivity (think of health care and education) and other sectors where productivity is growing faster than demand (think of manufacturing). In the sectors where demand is growing faster than productivity, you have rising relative prices, or “cost disease.”

2. In health care and education, you also have a lot of government intervention, and government intervention almost always takes the form of subsidizing demand while restricting supply. Of course, that is going to cause relative prices to be higher, thereby exacerbating “cost disease.”

3. I would argue that there are plenty of barriers to competition in the college market. Accreditation is one such barrier. But there are natural incumbent advantages as well. You may be able to enter the market for high school graduates who are in no way prepared for college. But trying to enter the market at the level of a top 100 college is nearly impossible.

4. There are plenty of barriers in health care, also. Clinics are a good innovation, but the real expenses in health care are in chronic illnesses, and clinics do not compete to treat diabetes, Alzheimer’s, and so on.

5. It is in the nature of organizations for middle managers to try to build empires, adding to cost without necessarily creating value. In for-profit businesses, the owners have an incentive to check this, because the owners want to maximize profits. In non-profits, the natural checks operate only when revenues are not rising to cover the cost of expansion. Non-profits only worry about the bottom line when it threatens to go negative.

In short, some “cost disease” is natural. At any given time, some industries will have demand growing faster than productivity. However, much of it is artificial, as government subsidizes demand and restricts supply. Finally, some of it results from the fact that non-profits are less efficient than for-profit firms.

Libertarians vs. Human Nature

I believe that humans in large societies have two natural desires that frustrate libertarians.

1. A desire for religion, defined as a set of rituals, norms, and affirmations that are shared by a group and which the group believes it is wrong not to share. Thus, rooting for your local sports team is not a religion, because you realize that it is not wrong for someone else not to root for your local sports team. But if you are against GMO foods, then you believe that those who disagree with you are wrong.

2. A desire for war. I think that it is in human nature to fantasize about battles against tribal enemies. War arises when those fantasies are strong enough to drive behavior. People who have recently experienced war have mixed feelings about it. Some want revenge for defeats. Others are sick of war. The sickness of war often dominates, but not always. If there has been no recent experience of war, there is a gradual loss of the aversion to war, and war becomes more likely. Peter Turchin takes this view. Incidentally, Robin Hanson recently binge-read Turchin. I think that the way to read Turchin is to view his thought as 95 percent intuition/theory, 5 percent empirical analysis. Turchin himself would prefer you to believe that he is much more driven by empirical analysis.

If these desires were to disappear, I believe that humans could live without a state. However, given these desires, the best approach for a peaceful large society is that which was undertaken in the U.S. when it was founded: freedom of religion guaranteed by the government, and a political system designed for peaceful succession and limitations on the power of any one political office.

At the moment, I fear that the anti-Trump resistance strikes me as having the characteristics of a religion whose followers are fantasizing about war. Perhaps there is a symmetry on the other side, but it is dampened by the fact that when you hold the Presidency you can get your way peacefully (if coercively).

I think that it is fine for libertarians to warn of the dangers of religion and to oppose war. That is what I am doing here. On other other hand, when libertarians assume away the desire for religion and war, their thinking becomes at best irrelevant and at worst nihilistic.

K-12 Spending and Children with Special Needs

Education Realist writes,

dive into “special education”, the mother of all ed spending sinkholes.

… research hasn’t revealed any promising practices to give those with mild learning disabilities higher test scores or better engagement. And that’s just where academic improvement might be possible. In many cases, expensive services are provided with no expectation of academic improvement.

Read the whole post. A couple of comments from me.

1. The special-ed phenomenon supports a Hansonian theory of education spending, which is that it is about “showing that we care.” Who can be against spending money on children with special needs?

2. In California, lawyers have a great gig. It turns out that taxpayers will pay you $350 an hour to advocate for parents of special-needs children against the taxpayer-run schools.