Over at The Economist, Ryan Avent has a thoughtful rejoinder to my criticisms of his post on the value of a college education. I don’t think Ryan and I are too far apart in terms of both assessing the the facts of the situation and what to do about it, but rather wish to emphasize different things. I want to emphasize that on the margin a lot of people are probably going to college who would be better served doing otherwise, and much of our money and theirs is being wasted. Ryan wants to emphasize that in the long-run, both individuals and society in general benefit when the population is more educated, and so we should work to get people more educated. I think there is truth to both of these and they are not necessarily contradictory ideas. However, I do want to elaborate on some points of disagreement.

Ryan disagrees with my analogy that housing and education are alike in that they are large, leveraged, illiquid, and speculative investments. His first reason is cost: median housing cost is $218,000, whereas the average education cost is $50,000. But here he misses opportunity costs. If you go to school you not only have to pay tuition, but you forgo the earnings and experience you would have got by working instead. For four years of school and an income of -let’s be conservative- $15,000 a year, this means forgone wages of $60,000. That puts the cost at $110,000. In addition, while the full opportunity cost of not buying a house is a complicated question, some type of rental or housing cost is going be incurred no matter what, so the $218,000 is certainly too high. If rental costs would have been 50% of housing costs (good luck!) then you’re at the same cost for housing and education.

He also argues that the benefits of education accrue over a lifetime, whereas the benefits of housing only accrue while you live in the house. I think this actually favors housing over education as a more liquid investment. The benefit of housing services can accrue to the owner over the life of the building, or the owner can rent that flow of services, or can sell the house for the net present value of the future housing services, in essence taking all the benefits today. In contrast, the benefits to education can only accrue over the whole of an individual’s life. There’s no way to sell the net present value of the benefits of the investment, it is what you would call in irreversible investment.

Lastly on this point, Ryan concludes that “an investment in higher education is unambiguously more conducive to mobility than an investment in a home”. There are multiple dimensions upon which one can be immobile. Having a highly specialized PhD in one method of repairing a particular kind of windmill only found in Holland restricts you occupationally and geographically. Having a highly specialized PhD in repairing a particular kind of windmill found all over the world restricts you occupationally. Owning a property with negative equity in Holland restricts geographically. None of these restrictions are insurmountable of course, but only at a significant cost. If you’re willing to lose the investment value of your education, then a college degree doesn’t restrict you to any industry. If you’re willing to lose the moving costs and a potential equity loss from a poorly timed market exit, than a housing investment doesn’t restrict you to a geographic location. Both types of investments can put you in a large debt hole, and both can cash constrain you. Both are risky and speculative. And both have their own type of illiquidity problem. And it seems to me that there are many people in this country every year who make bad investments in both.

Some things we probably agree on: I believe Goldin and Katz, who Avent cites, that education is one key to slowing or ameliorating inequality. I also believe that having an educated population is important to long-run growth. But importantly, I also believe the work of Erik Hanushek that shows that it is not years of education that matters, but quality of education. The following chart from a recent paper of his shows that the relationship between standardized test scores and economic growth is much stronger than the relationship between years of schooling and growth.

To quote Hanushek, “A country benefits from asking its students to remain in school for a longer period of time only if the students are learning something  as a consequence.”

I suspect Ryan would agree with this. Where he and I might differ is that I think we need to first make sure that marginal college students are getting their dollars worth and increasing their human capital, and then discuss how to send more people to college. If individuals are not getting their dollars worth on the investment, then that to me is a good sign it is not the best human capital investment we could make.  I am not an expert on this, but I’m not convinced that the twin studies, clever instrumental variables, and other complex econometric techniques that attempt to tease out returns to education while controlling for other investments and innate ability persuasively tell us that expanding college enrollment today will generate positive returns for the individuals or society.

If greater subsidies that expanded college enrollment just swells the ranks of the University of Phoenix does that really pass cost benefit? Is there a marginal dollar better spent on this than on improving high school education? And are these schools actually improving human capital, or are they just a signal of ability that employers will pay a premium for? What matters for economic growth and for individuals is actually increasing human capital. I don’t think expanding the ranks of college students without first reforming the bottom rung of college education is likely to be the best way to do it, in fact I think some of the time and money many individuals and our government currently spend on college could better increase human capital and overall well-being by being put to use elsewhere. Postal workers with college degrees come to mind.