Bastiat's Bastions

From the time we were young, we were told that the key to a good job is to get a good education. Is this right? I am sure we all know people who dropped out of school and were quite successful, and others who have Ph.D.s and cannot hold a job. Both of these types of exceptions to the general rule of better jobs with better education occur time and again. But these are exceptions. Getting a good job without finishing high school is betting against the odds. And that is a sucker bet.

 

The U.S. Current Population Report for 2002 found that on average, high school graduates made 50% higher incomes than did high school dropouts, and those with 4-year college degrees made almost twice what those who finished high school without additional education. The average doctoral earner made more than 3 times what the average high school only worker made. Also, high school dropouts make only about half of the average income for all those over 18.

 

More education is clearly related to higher incomes. Higher education gives people more options. If age or experience is taken into account, education becomes even more important.

 

In my home state of Louisiana, we have natural resource wealth in many forms and in great quantities. Oil, natural gas, farmland, water, timber, fish and wildlife are abundant in this state. A few years ago, I discovered that my own lot was above 3 of 4 natural gas formations below my subdivision. But in Louisiana, amid great natural resource wealth, our rates of poverty are among the highest in the country. Why is this? It is because Louisiana has among the lowest rates of high school completion in the country, with less that 75% of our above 25 population having completed high school, compared to high school completion rates in the upper 80s in states such as Iowa, Vermont, and Minnesota.

 

The wealth that states such as Louisiana and Mississippi lack is something economists call “human capital.” Human capital is the knowledge, education, skills, training, and experience that a person has that enables them to be more productive. Good health is also a form of human capital, as healthier people have more work days. What economists find time and time again is that more productive people earn more. And people who are able to produce things that people will pay a lot for get paid more. Along these same lines, education that is easy to come by, such as a degree purchased that requires little or no study is of very little value.

 

Adam Smith, the father of modern economics, noted over two hundred years ago that areas where education was highly subsidized, such as theology, had far greater supplies and far lower pay than areas where there were few scholarships.

 

In a study I did with Gohkan Karahan for Applied Research in Economic Development, we found that states with more high school completers and college completers had substantially higher levels of income, even when controlling for factors such as the percent of those under 18 (kids who don’t work much) and those over 65 (seniors who don’t work much) and for those in the latter years of their work lives.

 

Another factor to consider that makes it less likely that high school dropouts will make dropping out even more costly: high school dropouts are much more likely than high school completers to land in jail with more than 50% of African-American male dropouts and more than 10% of white male dropouts getting prison records before they turned 30.

 

Does more education guarantee someone a better job? No, but it sure makes better jobs easier to get and unemployment much less likely. Is all poverty due to a lack of education? Certainly not, poverty has many causes. But people who are not able to complete high school for some reason or other start off with two strikes against them and must face the next pitch with a blindfold on.

 

Want to fight poverty? Help a child stay in school.

 

-MC

Perhaps, by now, you should have heard of the proposal by economist Roland Fryer that poor children  in New York City and their parents be given financial rewards, money, for good grades in school, for good attendance, making it to parent/teacher conferences and so forth.   I am worried that payment for certain behaviors will create expectations for payment for others.   Behavior not rewarded may be the same as behavior that is punished, and less of these other behaviors would be expected to occur.   While I am not a fan of Fryer’s proposal,  middle-class families, parents, or more usually grandparents, often give kids a few bucks for good grades.   Parents and grandparents giving money to kids for good grades certainly seems to encourage school performance, not diminish it. Poor children, however, seldom have such generous grandparents, so Fryer’s proposal, if enacted, does seem as if it would encourage good school performance. Barry Schwartz, a Swarthmore psychologist, penned this editorial for the New York Times, suggesting that Fryer’s proposal will backfire.   Schwartz’s argument is “filled with holes.” (That is a great phrase, isn’t it? Filling something  up with holes–the Louisiana Department of Transportation’s method of road repair.)    For instance, his Swiss Canton example is about hypothetical choices.   What peoples say they will do or accept, and how they act are often at odds.  

A similar argument was made in 1970 by a British social scientist, Richard Titmuss, wrote a book, The Gift Relationship: From Human Blood to Social Policy (see this book review of a 1999 reprint of Titmuss’ book).    In his book, he argued that the British system, where blood given out of altruistic motivation (love) was superior to the

U.S. blood supply system, where we paid for whole blood in many areas.   Red Cross, of course, loved Titmuss.   Economists, such as Kenneth Arrow, took issue.  

There are, admittedly, safety reasons to be concerned with paid blood.   Many blood banks located near skid row and paid homeless men (we called them bums back then) for their blood, who sometimes gave blood tainted with hepatitis.   The problem, though, with the safety of the U.S. blood system, however, was that the medical associations in every state of the union had lobbied their state legislatures to make blood supply a “service instead of a good.”   This enabled them to skate product liability laws that would have made the doctors liable for giving tainted blood.   Doctors, however, are the ones administering the blood and are in the best position to pick blood banks.   If doctors had be liable, they would not have used blood banks that used the homeless.   In fact, in those days, the safest blood in the country was “paid’ blood in Minnesota used by the Mayo Clinic.

Titmuss was exactly wrong about blood and so is Schwartz about the rewards of learning.        Different people see different things as rewarding.   Some see learning as its own reward, but many of the students that Fryer is dealing with, from poor, disadvantaged families in New York City, do not.   The thing about money is that it is a generalizable reward, and can increase selected behaviors with just about anyone–if the monetary reward is salient.   The larger the monetary reward, the more people who will engage in the monetarily rewarded behavior.  So, while one person  out of a thousand may have their warm fuzzy rewards of learning “crowded out” by financial rewards, so many more  will perform according to Fryer’s expectation.  

The idea that one reward crowds out others, seems mostly mistaken.   Suppose in my earlier years, I had been a roady for my favorite rock band.   I might have done it for free, to get to go to all their concerts, hang out with them.   Oh, but they want to pay me, too?   Can life get any sweeter?

Not everyone gets warm fuzzies from giving blood.   Not everyone gets warm fuzzies from learning Shakespeare, or high school chemistry.   The ones that do say “wow, I get to do what I like and someone pays me for it, too.”  

Do scholarships reduce the learning by students?   If we gave everyone A’s (or C’s) would they start learning more because now there is no kick to learning?   Does the performance of TOPS scholars fall because of the financial aid?   I doubt it.

While there may be one or two twisted souls who respond as Schwartz suggests, far more people respond to monetary incentives, especially people who are on the financial edge.   Monetary rewards are likely to be more important for the very poor than for the well-to-do for the same behavior.

There are very few things that people do that they take offense to getting paid for.   There are, admittedly a few.   Dating and sex seem to lose a bit of excitement when they involve financial exchanges.   On the other hand, very few people who love to play sports would say “gee, now that someone wants to pay me for doing something I love, it loses all its spark–find someone else to return kickoffs–I’m outta here.”

While there may be cases where students who see learning as its own reward, with the financial worries of poor families, and the extent that educational success is often looked down upon by peers in poor communities, it is doubtful that the net result of Fryer’s suggestion of paying for grades will be reduced performance.   The Church relies on higher callings to fill the ranks of the Priesthood, and few, at least few Americans, get called.   We rely on Titmuss and Schwartz reasoning and forbid payment for blood and for organs–and we see bad shortages of each with thousands dying each year waiting for organs to be donated, while viable organs get buried.   What if we relied on altruism to fill the ranks of the military, the police force and the medical profession.   We would be very sick victims of crime, living in a country over-run by some foreign demagogue, such as Venezuela’s Chavez.

–MC

I got an email over yesterday that said:   Block this site!   Don’t let your students see this!   This is humor  only  economists should hear…and no one else!

Well, here is the site:

Oh, and my students, no points for commenting  on this one, you still might want to check out the link at http://www.youtube.com/watch?v=VVp8UGjECt4

MC  

Shameless, I know, but I thought that would get some of our readers’ attention. However, this post is about an “un-initiation”. Read the NY Times article here.

The basic story, allegedly, is that the national offices of Delta Zeta sorority (more or less) kicked out nearly 2/3 of the members of their chapter on DePauw University’s campus.

The national offices say they were concerned with the declining membership of the DePauw chapter. The officials came to campus to conduct interviews, ostensibly concerned with the members “commitment to recruiting new members”. Members were told to look their best. After the interviews were conducted, 23 of the members were essentially asked to leave the sorority, leaving only 12 members. Those asked to leave were deemed to be deficient in their “commitment to recruiting new members.”

However, some former members allege this stated reason is a red herring, and the officials’ determination seemed to be unrelated to the members’ actual willingness to recruit. These former members suggested that national officials were worried that the reputation of the sorority, as measured by student stereotypes, was negatively affecting recruitment. (The word “socially awkward” was used by students when stereotyping members of the sorority.) These same former members claim the “commitment to recruitment” was the excuse used to purge the sorority of “undesirable” members.

As it turned out, every one of the overweight members of the chapter was deemed deficient in their commitment to recruiting, as were several minority members. Lending credibility to the former members’ allegations, half of the remaining 12 members quit the sorority voluntarily after the actions of the national office.

So why discuss this in an economics blog?

This is interesting to me for two reasons. First, it gives me a chance to discuss two economic theories – club goods and franchises, both of which you folks wouldn’t likely catch in an introductory class. Second, it gives me an opportunity to introduce you how economists think about discrimination. I’ll focus here on the clubs and discrimination, and get to the franchises another day.

As mentioned, the first of the theories is the economic theory of clubs, which applies to all clubs, not just sororities and fraternities. Believe or not, some economists sit around and try to think about what it is that a club “does”, and even what is the optimal size of a club. In a nutshell, the economic function of a club is to provide a shared economic good (or experience) to its members, while often excluding those goods (experiences) from non-members.

Examples of clubs include chess clubs, sororities, Sam’s Club, writers of this blog, and season ticket holders of LSU football. The fact that people have been joining sororities for years seems to suggest there is some benefit of this club. People would not incur the costs (both monetary and time) of joining clubs if there was no benefit.

Though some groups will accept all members that are willing to pay the “dues” (do sororities?), the exclusivity is often very important. Each of my examples above has a differing requirement on membership or dues, and each provides a different experience. As an aside, I should note the initiation for new members of this blog is quite secretive, but does not involve hazing of any kind, but does include some razzing.

No discussion of clubs and exclusivity would be complete without a classic from Groucho Marx, who said, “I don’t want to belong to any club that will accept me as a member.” Think about this statement – it is a pointed commentary on exclusivity.

Before we condone or decry the actions of DZ’s national office, a bit more thinking is in order.

1. Is it fair to allow limiting membership of groups? That is, is it reasonable that clubs should be able to decide who is a member of their club?

2. If a sorority restricts its membership to people with the characteristic of being thin, is this acceptable?

3. What if “thin” is replaced with “studious”? Or “socially at ease”? Or “nice”? Or “white” Or “female students at DePauw”? Or “female students”?

4. Does it make a difference if we change the word “club” or “sorority” to “krewe”, “country club”, “professional baseball team”, “college”, or “circle of friends”?

5. Where is line drawn?

When it comes down to it, the formation of clubs (at least one that does not accept all comers), leads to some form of discrimination occurring. Even if one favors one group, one is discriminating against another. Isn’t purchasing a Beyonce album discriminating against Johnny Cash albums? Surely this is not immoral, nor illegal.

Is it wrong for Harvard to discriminate against people with low ACT scores? Is it wrong for the New Orleans Hornets to discriminate against slow white guys named Chad Turner (even though he has a deceptively quick first step a solid 3-point stroke) because his vertical leap is only 19 inches?

Now re-read questions 1 through 5 above? Do you pause a second longer?

The point I am trying to make is this: some of that discrimination is illegal (a positive statement), some of it is morally wrong (a normative statement), but it is all discrimination.

Where should the lines be drawn?

–CT

Some disclaimers:

I was (still am?) aptly characterized by the term “socially awkward” during my college years.

In the interest of disclosure, I was not a member of a fraternity (or a sorority), though have several friends and family members that were. I’m not anti-DZ, anti-sorority, anti-fraternity, or anti-Greek system. I realize that each chapter of a sorority (fraternity) is different.

And while I don’t personally condone the activities of DZ’s national offices, this post it is intended to be less about a particular situation, and more about the economics of clubs and the difficulty we have in delineating what type of discrimination is legal/illegal and moral/immoral.

And to head off (or at least delay) a few comments/complaints, I do realize there is a huge difference between the real world situation in the article and the scenarios I outlined above. I asked above if the members of the group have the right to choose its members in a fashion they wanted, while in the article the national organization is making the membership decisions. I’ll attempt to address this difference in part II.

F. A. Hayek, in his influential article, “The Use of Knowledge in Society,” discussed the problem of planned economies, like Soviet Russia.   He claimed that not only was there a serious incentive problem, but more importantly, there was a knowledge problem.   The problem is that no single person can know all the information required to produce even simple products, yet alone everything that a society needs in order to prosper.   This formed the basis of Leanord Read’s famous essay, “I, Pencil,” (which some students may recall Milton Friedman used in his film, “Free to Choose”), which tells how no single person knows all of what it takes to make a simple wooden lead pencil.  

Market economies solve this problem through prices that convey useful information about the relative availabilities of productive resources (answering the question of how to produce) and relative wants of people (answering what to produce).   Here is a very insightful article that appeared in the Washington Post on Hayek, the Wikipedia project, open-source software projects, and prediction markets.   It is well worth reading and thinking about.

 MC

Take a look at this CNN article on trouble that New Orleans public schools are having in attracting teachers.

The idea of a compensating wage differential as at least as old as The Wealth of Nations, which Adam Smith (the father of modern economics) wrote in 1776.

Workers who work in jobs with more desirable conditions will accept lower wages than people who work in jobs with less desirable conditions. The gap between the wages of workers at different locations is though of a as a “compensating wage differential”. The additional wages are required to compensate the worker for working in less desirable conditions.

Why? The dynamics are simple. Suppose there are a number of identical workers, and two otherwise identical jobs. One job (think school) has a desirable characteristic, while another does not. If the wage started out the same in both schools, obviously people would be flocking to work at the school with the desirable characteristic rather than the school with the less desirable conditions. Principals would have many candidates to choose from at good condition schools, while principals at bad condition schools would have a difficult time attracting workers. In fact, there would be a shortage at bad condition schools and a surplus at good condition schools.

Now, some folks hoping to get a job at the good condition schools might offer to work at a slightly lower wage, or accept a lower wage, to avoid the bad condition school. So would others. We’d expect wages to fall at good schools. By the same token, some people would accept a job at the bad condition school if they were offered a higher wage. So would others. We’d expect wages to rise at bad schools.

Eventually, the size of the wage gap would change until there was no incentive to try to move from one type of school to the other. The “last” teacher would be indifferent between working at the good school or the bad school. The extra wages at the bad condition school would be just enough to compensate for the disutility associated with working under these bad conditions.

Now, back to the article…it points to a number of conditions in the public schools – all of which could be a source of a compensating wage differential: expensive housing prices, large class sizes, and violence in the area (and perhaps the school). The article points out public school district faces a shortage of workers, and further points out that “charter schools” don’t seem to be having a problem.

Some school officials even attempt appeal to potential teachers’ feelings of good will – hoping to get them to work in the public schools. Do you think their appeal to people’s good nature (“to their sense of adventure and desire to make a difference”) will be effective? I don’t think that will work. If you do, may I appeal to your sense of adventure to mow my grass? There must be a better way…

What does this information in the article tell you about the wage structure in the teaching market in New Orleans? How can the public schools solve the teaching “shortage? In fact, what is the only way they can solve the problem?

–CT

My brother just sent me this news story from Reuters:

http://today.reuters.com/news/articlenews.aspx?type=businessNews&storyid=2006-11-16T185745Z_01_WBT006219_RTRUKOC_0_US-FRIEDMAN.xml&src=rss&rpc=23

The story is about the death of Milton Friedman at the age of 94. Professor Friedman was probably one of the 20th century’s most important social thinkers. His theories, and those of his followers, helped convince policy makers about the importance of bringing down inflation, and why inflation is such a poor tool to fight unemployment. In the 70s when I was in college, inflation spiralled from about 4% per year to about 13% and really got out of hand. Since then, the Fed has been more careful about the growth of the money supply and our inflation rate has gone to about 2-3% per year, as measured by the CPI, which usually overstates the inflation rate by at least 1 percentage point.

In addition, Milton Friedman has been a tireless freedom fighter, fighting for everyday freedoms. He also was the person who invented education vouchers and started the whole education choice discussion.

Professor Friedman will be missed, but he certainly will not be forgotten.

Morris Coats

One of New Orleans‘ original “Catholic League” schools, Holy Cross, recently announced its intention to move its campus out of the lower 9^th Ward. The area had been in decline for years and hurricane Katrina heavily damaged the century (plus) old campus. There was somewhat of a battle over the new site – some wanted the school to relocate to Jefferson Parish, others wanted Holy Cross to stay in New Orleans. New Orleans won, so to speak, as the school announced it will move into a recently vacated Archdiocese of New Orleans school district.

What I found interesting was the logic that some opponents used to fight against Holy Cross moving into Jefferson. A recent article in the Times Picayune stated:

Ray Ferrand, principal of Bonnabel High School in Kenner, said Holy Cross would increase its enrollment at the expense of Jefferson Parish’s public elementary, middle and high schools.

Joe Potts, head of the Jefferson Federation of Teachers, urged the board to reject the sale, saying it does nothing to help public school children.

Holy Cross charges a tuition of about $6,000 per year. If parents would opt to take their children out of Bonnabel, where they do not directly pay any tuition, to spend $6,000 per year, could this possibly be indicative of a problem with Jefferson‘s public schools? And is it is even plausible that increased competition for Jefferson‘s public schools could lead to improvements? If Holy Cross had paid Jefferson Parish more than $2 million for land, couldn’t that money have been put to use to aid the public schools?

NM

Credit where it's due – I snagged the article from thesportseconomist.

The topic is whether or not college athletes should be paid. The article, written by John Wilner at the Mercury News, reports a reasonable estimate of the amount of revenue that is "generated" by Cal's running back Marshawn Lynch.

Lynch is no average player – he is on a lot of pundits' short lists for the Heisman Trophy, an award given to the best college football player each year. The article points out that the scholarship Lynch receives as compensation for his services is worth in the neighborhood of $20,000, while Lynch brings in roughly $800,000 of revenue to the University. By the metric, Lynch is vastly underpaid.

Of course the source of this underpayment is the fact that the NCAA prohitibits colleges to pay college athletes – effectively capping their compensation at the value of the scholarship they receive. If Lynch were able to sell his services in a unrestricted market, there is no doubt he would earn much more money.

Do you expect athletes to be "paid" anytime soon? Three things to consider first.

1. The rhetoric on idealism, traditionalism, and amateurism. Is this just rhetoric? Or do people really like amateurism. Is college football even "amateur"?

2. Universities compete to field winning football programs. Univerities can improve their chances of winning by recruiting more talented players, more talented coaches, and by enhancing facilities, just to name a few. Since direct monetary compensation for athletes is prohibited, this will increase the intensity of competition on other margins. Fortunately for the folks who are coaches and athletic diretors, there is no cap on the compensation of coaches and athletic directors. In a world with pay for athletes, might coaches and administrators get a smaller fraction of the pie? Would these folks be in favor of paying players if it reduces their compensation? Who is on the front line of making the decisions about pay for athletes?

3. At big-time Division I programs, the football program turns a surplus (profit). Some of this surplus (which of course is larger because they do not have to pay players) is spread around to other athletic programs within the university that do not generate a surplus. For instance, women's soccer or men's golf – these programs are subsidized by the football program. If football players were paid, would this limit the funds available for these so called "non-revenue sports" (title IX considerations aside)? Will the women's soccer coach be in favor of paying footall players if it ultimately cuts in to the soccer budget?

–CT

I received a textbook in the mail today. It was from N. Gregory Mankiw. Dr. Mankiw wanted me to have a copy of his principles of microeconomics textbook, compliments of Dr. Mankiw.

I am not sure it will be a surprise, but college professors don’t pay for textbooks. There are (at least) two ways we can get the freebies (called “desk copies”).

1. We can request a desk copy. Essentially, I would be expressing some interest in adopting a text for a class, and the salesperson assigned to NSU will send me a copy. It would be very unusual for a professor who requested a copy to sell this book, but I had a few friends in grad school who drank many a beer on the book reps.

2. They simply arrive, unsolicited, at our offices. This is the case with Dr. Mankiw’s book. It turns out there is a new edition out, I once previously adopted this book, and it probably makes good marketing sense to send me a copy. Sometimes I get books unsolicited that I have never heard of that I am unlikely to adopt. Importantly, it is my sense is it is *not* that unusual for a professor who had *not* requested a copy of the book to sell the book.

Since the publishing company is not in the business of giving away free stuff for giggles, they must think that giving away desk copies leads to increased adoptions and thus greater demand. I bet they’re right.

However, interfering with their efforts are a legion of entrepenuers called “book buyers”. These folks knock on our doors, often. They offer us cash to part with our desk copies. Surely the value to me of possessing my 14th principles of microeconomics book is quite low, and these book buyers know this. They’d like to buy the books from professors and sell them to students or bookstores, who presumably are willing to pay more. In doing so, they earn a return for their services.

I respect these book buyers, they are making the world a better place – they move a book from a low valued use (sitting on my shelf collecting dust) to a high valued use (hopefully not *just* sitting on a shelf in some dorm room collecting dust).

Surely you could think of a reason why the publishers don’t like these book buyers. Used books and new books are substitutes. The existence of these used books surely reduces the demand for the new books.

Publishers have been dealing with this for some time. It used to be the case that a copy sent to a professor would be labeled Instructor’s Edition. The thought, no doubt was, that bookstores and bookbuyers or students would refuse to buy these books because they were originally complimentary. I’m not sure if you refuse to buy instructor’s copies, but they are out there. It wasn’t a slam dunk.

Finally, back to Dr. Mankiw. On the front cover of the book I received today, it says “Personalized Instructor’s Edition” and more importantly(?) it says “Specifically prepared for Professor Chad Turner, Nicholls State University, Compliments of N. Gregory Mankiw.”

Why would his publisher incur additional costs to print my name and university on the cover?

Do you think it will work?

Anybody want to buy my book?

–CT