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The Obama administration’s attempts to regulate for profit colleges are reportedly being “watered down” under pressure of lobbyists and the industry:

Last year, the Obama administration vowed to stop for-profit colleges from luring students with false promises. In an opening volley that shook the $30 billion industry, officials proposed new restrictions to cut off the huge flow of federal aid to unfit programs.

But after a ferocious response that administration officials called one of the most intense they had seen, the Education Departmentproduced a much-weakened final plan that almost certainly will have far less impact as it goes into effect next year.

Maybe “much-weakened final plan” is in fact  watering down good regulations as a kow-tow to political pressure as a former Education Department official who helped shape the original plan claims. Or maybe the administration “listened to what they viewed as reasonable arguments and decided to narrow the scope of the original plan” as Cass Sunstein claims. Maybe it’s a little of both. As far as I can tell from the article, this is the meat of the changes:

The final standards leave a maximum of 5 percent of schools facing financial sanctions at the start; the original plan would have meant penalties against an estimated 16 percent.

The rules also pushed back the penalties to 2015 from 2012, while requiring schools to disclose more data about loans, defaults and job placement.

My gut instinct is that this constitutes watering down, but I’d put very little weight on that. What seems clear to me is that the original form of the new regulations as envisioned by the administration contained a much more egregious and much larger “watering down” in the application of the regulation to for-profit schools only, rather than both for-profit and non-profit. On what basis can one justify this exemption?

One can argue that the for-profit sector vastly underperforms the non-profit sector, and thus is the one in need of stricter standards. But it seems hard to argue that 1) standards have been designed to affect only underperforming colleges 2) non-profit schools aren’t underperforming, and 3) subjecting non-profit schools to the standards would affect them. If subjecting them to the regulations will harm them, then they are underperforming. If they aren’t underperforming, then subjecting them to regulations won’t harm them.

I think mood affiliation makes some people instinctively see for-profit schools as bad and deserving of attacks, and non-profits are good and deserving of praise. Diane Ravitch is the exemplar here. The popularity of this bias explains why the egregious exemption of non-profits from this law can exist. This is why people see the extremely low graduation rates of some for-profit schools and declare with outrage that they are failing and in need of major reform, and yet look at the sky high dropout rates at our nations worst public schools and scoff that teachers can only do so much and that poverty is the real problem. (I will let someone else write a post drawing parallels between this law and NCLB and highlighting inconsistent criticisms therein, but suspect it is a rich topic for exploration.)

To a lesser but still real extent, I think mood affiliation bias probably makes it easier for some on the other side to acknowledge the extent to which socioeconomic status should be considered in school performance measures when the class of schools we are talking about are largely unregulated for-profit corporations and not union dominated public sector institutions.

This is not to say that one must have equivalent scorn or praise for the worst for-profit colleges and the worst public schools, but that the extremeness, starkness, and gut level of these reactions is problematic.

Mood affiliation is everywhere in education, and it will continue to hold back real reforms.

Lisa Belkin at the New York Times reports on paternalism aimed at making parents more paternalistic:

…other states have already enacted laws aimed at improving parenting. Alaska fines parents for a child’s truancy. In California, a misdemeanor charge can be brought against a parent if the truancy is flagrant enough. California is also the first state to allow judges to order parents to attend parenting classes if their child belongs to a gang.

I’m going to take the lazy route and sidestep the whole issue of whether these types of policy are a worth trying, and just say that probabilistically, I think Belkin is correct:

In the end, then, all these “punish the parents” paradigms will probably take their historical place as just one more shift of the pendulum in the sweep that already includes contradictory certainties like “children are being allowed to grow up too quickly” and “children are being infantilized too long.” Like every other new way of thinking, it will eventually be looked on as a well-intentioned but flawed reflection of a moment in time.

In her 2010 polemic, The Death and Life of the Great American School System, Diane Ravitch has praise and criticism for KIPP charter schools. On the one hand, she recognizes the organization improves scores for students. On the other hand, she credits this success, in part, on the schools ability to kick out hard to educate students:

…KIPP schools often have a high attrition rate. Apparently many students and their parents are unable or unwilling to comply with KIPP’s stringent demands. A 2008 study of KIPP schools in San Francisco’s Bay Area found that 60 percent of the students who started in fifth grade were gone by the end of eigth grade. The students who quit tended to be lower-performing students. The exit of such a large propotion of low-performing students –for whatever reason- makes it difficult to analys the performance of KIPP students in higher grades. In addition, teacher turnover is high at KIPP schools as well as other charter schools, no doubt because of the unusually long hours.  Thus, while the KIPP schools obtain impressive results for the students who remain enrolled for four years, the high levels of student attrition and teacher turnover raise questions about the applicability of the KIPP model to the regular public schools.

Note that teacher turnover in-and-of-itself is considered a problem. I find it baffling to consider success alongside high turnover as evidence of a limitation of the sucees rather than as evidence that turnover is not necessarily a problem.

The italicized portion of her quote is of particular interest, since it is directly contradicted by a study from Mathematica Policy Institute that showed that KIPP improves test scores for students that ever attend KIPP, including those that leave early. This is a direct contradiction of her claim.

As she does throughout the book, Ravitch drives the point home with a rhetorical flourish befitting of a speech at an NEA pep rally, lamenting the unfair advantages that charter schools have, and how easy that makes it for them compared to the underdog public schools:

Regular public schools must accept everyone who applies, including the students who leave KIPP schools.   They can’t throw out the kids who do not work hard or the kids who have many absences or the kids who are disrespectful or the kids whose parents are absent or inattentive. They have to find ways to educate even those students who don’t want to be there. That’s the dilemma of public education.

Ravitch creates the image of KIPP schools taking better students from public schools, and simply kicking out bad students, sending them back into the public school system. This negative model of charter success is an important theme in the book. However, another recent study by Mathematica Policy Institute shows that her claims here are also false. They found that students leave KIPP schools at the same rate as they do for nearby public schools. In fact, for black and hispanic students, the attrition rates for KIPP were lower.

Ravitch also credit’s the lottery admissions for KIPP’s success. Her argument is that

“Like other successful charter schools, KIPP admits students by lottery; by definition, only the most motivated families apply for a slot. Charters with lotteries tend to attract the best students in poor neighborhoods, leaving the public schools in the same neighborhoods worse off because they have lost some of their top-performing students. They also tend to enroll fewer of the students with high needs – English-language learners and those needing special educaiton.”

This complaint puzzles me. Ravitch once was a supporter of charter schools. But if lotteries are “by definition” going to cream skim and advantage charter schools, how did she ever support them? Her argument here is definitional, and not a matter of data. When criticized for changing positions on education reform Ravitch likes to quote Keynes who, perhaps apocryphally, said “When the facts change, I change my mind. What do you do, sir?”, but have the definitions changed as well?

Furthermore, the Mathematica study found that KIPP did not admit the “best students”. On average, KIPP entrants were “not more advantaged than other students in their communities, as  measured by poverty and prior achievement levels”. For instance, 84% of students who attended the sample of KIPP schools qualified for a free lunch program, compared to 64% in KIPP host districts, and 72% in the elementary schools that send any children to KIPP. They enroll more minorities, and they enroll students with lower test scores than the district average and the same as the average for the public schools that KIPP students came from.

They do find that KIPP tends to enroll less ESL students and students with disabilities, but this is not the same as admitting the “best students”. Ravitch clearly agrees with this, as you can see in the quote above she includes the complaint that KIPP doesn’t admit enough ESL and disabled students as distinct from and in addition to the complaint about only letting in “the best students”.

These results are important because if Ravitch claims that KIPP cream skimming higher acheiving students makes public schools worse off, then the fact that they take lower performing students must make public schools worse off. This doesn’t just remove a complaint about charters then, it actually represents a benefit to the public school system. This positive impact of more charters and choice on public schools is reinforced by studies that have shown public schools improve in response to more competition, an entire vein of literature ignored in Ravitch’s book.

These are clear examples of the facts disproving Ravitch’s claims. Will future editions of her book correct this? Will she call attention to this fact and publicly reverse her opinion of KIPP?

Noah Smith graciously responded to my post regarding education, pointing out a very interesting fact that I had overlooked:

Niklas Blanchard at Modeled Behavior basically agrees. But there is one point of mine that I think he doesn’t quite get. He asks: “But why would there be a supply shortage at such high tuition rates?” His answer is that universities require such huge initial investments, and take so long to pay off, that building them is not feasible for the private sector. I think that although this is true, the main reason for the supply shortage is that schools don’t “pay off” in the traditional sense, ever. Colleges just seem to only work well as nonprofits. And the only people who are willing to invest huge amounts of money in nonprofits are the government and rich private individuals (e.g. Leland Stanford). We have a supply shortage because governments make the decision whether or not to build new public-school campuses (and recently they have not done so), while colleges themselves can only respond to skyrocketing demand by raising price.

I agree, and this adds to the discussion…but this fact also raises even further questions.

First, what makes universities “work” as nonprofits and not for-profits? I suspect that there is a tiny bit of bias in the datasets between state universities and for-profit colleges as far as outcome, but still, for-profit institutions have a very large dropout rate*, and generally don’t have the prestige of even a poor state-sponsored institution. For example, I live in Council Bluffs, IA, where graduating from Iowa Western Community College is something of a badge of honor, and graduating from ITT Tech is sort of a joke. Still, seems like a value (aka signalling) judgement.

Bottom line: if the fact of reality is that you need a piece of paper marked by calligraphy (as network theory would suggest), then institutional capital plays a large role in differentiation.

Second: We are more wealthy now than we have ever been as human species. However, in the 18th/19th centuries the mark of a successful philanthropist was to start a university (i.e. Leland Stanford). Where are the philanthropists today? Today, the mark of a successful philanthropist is starting a fund for children in Africa. I don’t begrudge this development (although I do begrudge the deployment of much philanthropy), but it bears investigation. The closest analogy I can think of is live-performed classical music, which survives almost solely on government subsidy. There is an interesting story here. The marginal productivity of performing Beethoven’s 9th is not changed since the 19th century. In fact, more people know it more perfectly today than ever before in history. We can reproduce it in multiple mediums, at higher quality than any single person watching Beethoven conduct his symphony ever dreamed. Yet, many countries see it fit to heavily subsidize the live performance of the opera.

I doubt a for-profit company would structure themselves around playing the Classicals. But back to the issue at hand. The dichotomy between the highly wealthy and the common man was astronomically higher in previous times than it is today. One would say that it is like the wealthy today vs. the poor in Africa. And that would explain the trends in philanthropy. People in rich countries have risen to a level of affluence such that class is not about income in America, it is more about various measures of signalling in a large echo chamber. I would point out that the initiative for universal education has made the world this way, but that seems redundant. The point is that the “theory of second best” would say is that since increasing levels of wealth, and previous government distortions provided us with a landscape where it is incredibly hard to build institutional capital for a new university, then the government should step in an provide for the deficit.

My reading: There was a market for education, and then the market was destroyed by productivity, and subsequently subsidized.

I’d be eager to hear your take (and what Noah has to say)!

P.S. If you buy this analysis, it points to either a structural deficiency in the way humans acquire skills, or a structural deficiency in the way certain groups perceive humans acquire skills. I tend to lean toward the latter.

*Note, that many of these comparisons are not “apples-to-apples”. I work for a university that caters to the armed services, adults, minorities, and foreign exchange students. One cannot expect that we would have the graduation rates of a typical four year institution.

Given the skyrocketing costs of higher education in the United States, it is worth asking whether there is a supply side deficiency in higher education, or is education a bubble that might or might not be particularly hard to pop? Especially given that student debt has surpassed credit card debt for the first time ever. Noah Smith raises this question on his blog in response to a Matt Yglesias post regarding human capital stagnation. I am intending this as simply raising questions about the subject. As you will note by the end of the post, I offer a hypothesis that broadly agrees with Noah.

Yglesias is, of course, completely right. In fact, human capital stagnation seems to me a much likelier culprit for a “Great Stagnation” than the dubious hypothesis of a slowdown in technological innovation. People can’t spend their whole life in school, so education really is “low-hanging fruit”.

The buildup of Noah’s post pretty much screams his conclusion: supply shortage. But why would there be a supply shortage at such high tuition rates?

The skyrocketing prices you see after 2000 does not reflect skyrocketing enrollment. If you look at his previous graph, enrollment in four-year programs has had a fairly uniform increase throughout the last half of the last millennium. Enrollment in two-year programs is essentially flat. If I showed you similar graphs regarding the housing boom vis-a-vis population (which Karl, in fact, has done!), you would likely immediately assume that there is a bubble. Enrollment, just like population, has grown fairly predictably. At least predictably enough for investment in educational capacity.

So no, I don’t really buy the supply story as a full explanation. But it is useful to ask why supply hasn’t expanded roughly congruent to the increases in price? One (I think powerful) explanation is that the fixed costs to education (the buildings, the teachers, etc.) is expensive, and that half (or more) of the battle is building institutional reputation. Private schools (like DeVry and Kaplan) have overcome the first barrier, but have largely failed to overcome the second. This is where the idea of the government (at least initially) funding a national university system actually has a lot of merit. The government is likely the only institution that can hemorrhage money at the rate it would take to build the institutional capital a successful, and respected post-secondary institution would need. As Noah notes, there is no shortage of Ph.D’s out there looking for work (but this isn’t, in-and-of itself a reason to hire them).

Another useful question to ask is, why don’t universities price based on demand for classes? Almost every university has a fixed tuition rate for every class, and then we try and shoehorn people into a financing option that satisfies said price. Our university certainly does, and it’s not at at clear that is the best use of resources. We often cancel classes that don’t attract enough students…but why? The professors don’t get allocated any differently, they just have one less class that semester. The marginal cost of educating a student is very, very low. Why not advertise a discount special, and fill those desks? You’re still paying the professor, and you already have the building (or online classroom, for that matter). It would be a golden opportunity for disadvantaged kids to snag education on the cheap. You may say that this would lead to many people putting off enrolling in classes until specials arise. It might (but excellent, consumer surplus and all), but that isn’t the experience of car dealerships trying to move inventory to make room for new inventory.

The answer to the second question, I suspect, has a lot to do with signalling…which could also be the driver of the inflation of education in a more broad sense. No one wants to have the status “discount school”.

Addendum: An alternative (and compelling) explanation has to do with the wage transmission mechanism between the financial sector, and finance/math/physics/econ professors. Their marginal productivity is literally based on enrollment, and largely fixed…and certainly hasn’t grown at an extreme pace. What has grown at an extreme pace? The salaries of their alternative options in the finance sector.

Karl has a post earlier today where he makes the case that the “love hypothesis” broadly explains trends we see in k-12 education. Specifically, that we school children in ways that show we care, rather than ways that maximally benefit children. However, he then brings up that this wouldn’t explain rising student debt:

What the love hypothesis doesn’t explain is rising student debt. Why are the students themselves taking on ever larger burdens. Is it so they can prove that they love themselves? That’s not totally implausible, but out the gate it doesn’t seem very compelling.

Fortunately, we don’t have to shoehorn the love hypothesis to fit. This is a kind of a form of the principal-agent problem…although not so much a “problem” per se. When children are the agents, and parents are the principals, then parents spend money in the ways that they see fit, which explains how the love hypothesis would provide a transmission mechanism from what parents spend into the type and amount of schooling that children receive, even if children (agents) aren’t really getting much out of it at the margin.

However, student loans are an example of the principal and the agent being the same person. Students are largely mortgaging their own futures in order to increase their marginal productivity. Thus they don’t need to love themselves, that explains why people spend money on other people’s education (indeed, it explains the skyrocketing tuition at ivy league schools, where parents do pay the bills many times).

I like to explain rising student debt (and thus, greater consumption of higher education) using education as a network good. Network goods are characterized by two concepts that would illuminate this: knock-on and tipping points. Put simply, if no one had a bachelor’s degree, no one would need a bachelor’s degree. On the other side of the coin, if everyone has a bachelor’s degree, then you are locked out unless you get one. The more people that have bachelor’s degrees, the more useful they are to those who possess them, until the network reaches a tipping point where employers begin preferring bachelor’s degrees, on to a point where employers require a bachelor’s degree. That pushes people into the market for master’s degrees, rinse and repeat. This could likely go on forever in an with infinitely-lived agents, and infinite degree successions.

Or maybe I’m just too dead tired to reason well today.

A common, although misleading, refrain heard from education reform critics is that charter schools on average do no better on standardized tests than public schools. Less commonly discussed is the impact on other, non-test outcomes. A paper (working version) in the most recent Journal of Labor Economics by Kevin Booker and Brian Gill from Mathematica, Tim Sass from Florida State, and Ron Zimmer from Vanderbilt, looks at how attending a charter schools affects the probability of graduating high school and attending college for a sample of students from Chicago and Florida.

An important question in the literature is the extent to which selection bias is a problem. Do charter school students have different outcomes than public school students because the charters educate them somehow better or worse, or is it because people who decide to go to charter schools are systematically different than those who don’t? In order to control for this they look at the sub-group of students who attended a charter middle school, and compare outcomes for those who went onto a charter high school to those who went on to a public high school. The idea is that selection bias shouldn’t be an issue between those who are already attending a charter school, because as charter school attendees they should be similar in terms of whatever unobservable variables lead to charter attendance.

They find that in both Florida and Chicago, attending a charter high school increased graduation and college attendance rates. In Chicago, students were 7% more likely to graduate from high school if they attended a charter, in Florida it was 12% to 15%. Charters increased the probability of attending college by 8% to 10% in both Florida and Chicago. The authors argue that these results are consistent with the studies on the effects of attending a Catholic school,  and a recent D.C. voucher experiment, both of which have been shown to improve educational attainment.  Consistent with the literature on the affects of charter attendance on test scores, they find that the impact in Florida is stronger in urban areas.

These are important results to keep in mind. Given education reform critics skepticism of standardized testing, I expect results like this will receive more weight for them than studies that look only at test scores.

The debate over public sector unions has been lacking in economic arguments, and the justifications argued on unions behalf have not been of the kind one usually finds in these debates among labor economists. The two main economic arguments for unions are to provide workers with voice, and to counteract monoposonies. My main concern here is the latter, but I’ll briefly address both with regard to teachers unions in particular.

With respect to the voice function of unions, a standard reply of labor economists is that the National Labor Reform Act should be changed to allow more non-union types of voice. For instance, the act prevents  firms from supporting any type of labor organization. That means a firm is unable to organize a non-union way for  workers to voice complaints, settle disputes, negotiate over working conditions. As Barry Hirsch argues, these parts of the NLRA, while not without legitimate purposes,  “restrict development of nonunion vehicles for employer-employee, cooperation and productivity-enhancing voice.” Canada, in contrast, does not bar employer-initiated or supported labor groups. And every progressive loves Canada, right?

The second economic argument for unions is to help counteract the power of monopsonies. In the public sector, this is certainly a plausible complaint. Given that governments are often the only ones providing some services, they may have large degrees of labor market power, also called oligopsony power. While few may be explicitly making this economic argument, the common concerns about teacher powerlessness in the face of fickle administrators certainly reflects this problem. In a well-functioning and competitive market, administrators would face repercussions for firing good teachers. For one thing, parents would be upset, and competitive enterprises suffer consequences when customers are unhappy. In addition, competitive labor markets would mean teachers would demand a risk premium to work at firms where they could be fired for political or illegitmate reasons. When there is no competitive check on a school, neither of these repercussions is as important.

Thus if we are concerned about the oligopsony power of schools, and we want teachers to be treated as other comparable professionals are treated, then one possible solution is to make schools more competitive by allowing more school choice, either through charters, vouchers, or simple choice among public schools. This way, if an administrator has a reputation for firing good teachers, there are consequences. This will not prevent unjust firings from happening ever, as no system could, but it will make it less likely. After all, we don’t worry too much that about good accountants getting fired, do we?

On the other hand, the lack of competition for government, and schools in particular, also provides the opportunity to earn so-called economic rents just as lack of competition does in the private sector. These rents may be shared in an organization among administrators and teachers, meaning that less competition means higher pay for teachers. So while more competition can mean more labor market power relative to administration, it may also theoretically mean lower pay.

In order to shed some empirical light on this issue, a recent paper (I can’t find an ungated version) by Lori Taylor at Texas A&M looked at teacher pay in Texas. Importantly, Texas is a right-to-work state so collective bargaining does not confound her analysis. What she found was that in a handful of very uncompetitive markets, teacher salaries actually would decrease as a result of more competition, meaning that they were sharing in some of the economic rents. In most markets however, oligopsony power meant that increasing competition among schools would actually increase teacher salaries. Here is how Taylor summarizes her results:

More than 88% of the teachers with less than 20 yr of experience would benefit from increased competition. Seventy-nine percent of the highly experienced teachers would also benefit. Only 2% of beginning teachers, 5% of experienced teachers, and 6% of highly experienced teachers could expect increased competition to lower their pay.Profits and Rent-Sharing.

To provide one example, she highlights the Houston, Dallas, and San Antonio areas, home to more than 70% of the charter schools in Texas. Prior to the existence of these charter schools, a 1% increase in competition would increase teacher salaries by 2.5%. Given these increases in salaries, it seems likely that non-wage power of teachers is increased as well, meaning it’s harder to fire a good teacher for bad reasons.

Despite the theoretical ambiguities discussed above, these really are common sense results: the more labor market opportunities you have, the less power your bosses have over you, and the more competition there will be to hire the best teachers. The only place this isn’t going to be the case is areas where teachers are earning rents and schools are very uncompetitive. In these areas teachers are already likely to be overpaid, and the other benefits from competition, like better student outcomes, are likely to be the greatest. Long story short: more competition helps the teachers who need it.

One of Matt Yglesias’s commenters offers this concern

I fear we’ll get a society where perhaps 10% of the people will own all the land and capital, and they will hire 60% of the people to work for low but comfortable wages, while 30% will be totally dependent on a welfare and the odd temporary job every now and then.

If this scenario is a real possibility, then the only solution I can imagine is highly progressive taxation and wealth distribution, so that the great masses can afford to employ each other (with restaurant meals and dance lessons).

After offering me a shout-out, Yglesias says

At any rate, I’m not blogging about land use at the moment because I’m hoping to build enthusiasm for a potential book, so let’s focus on the “capital” side of this arrangement. What’s missing from the doom analysis (and this is fresh in my mind since coincidentally I’ve been reading Ricardo) is the “human capital.” Employee compensation accounts for the majority of GDP because the majority of the actual capital available to the economy is inside people’s heads.

I’ll offer my interpretation of the phenomenon. It is decidedly neo-classical.

Redistribution is desirable because it raises the living standard of the person we are redistributing to. However, welfare-reinforcing-the-culture-of-poverty arguments aside, it shouldn’t change the basic structure of pre-tax national income.

In a completely free market economy the share of national income that goes to the various factors of production are determined by their role in production. To the extent human capital has a more important role, human capital will command more of national income. The same is true for physical capital and raw labor power.

However, the rents, to the factors are determined by their reproducibility. That is, how easy is it to make more.

The majority of the rise is living standards for workers occurred because they – the workers – were relatively irreproducible. It takes, according to modern law, 16 years to produce a new worker. Most producers, that is to say parents, are not induced, through higher wages, to produce more workers.

So the following scenario ensues. The economy grows larger and larger. Labor, even raw labor, has some productive role in the economy and so it has a share in this growth. However, the number of laborers is not growing as fast as the economy. Thus, labor’s share of the economic pie grows faster than the total number of laborers and so the share of the economic pie per laborer grows.

What we seem to be facing at the moment is culmination of several forces. I think most economists from Tyler Cowen to David Card agree that the production of human capital has become more constrained, while its role in production is growing.

The result is that the economy is growing, human capital’s share of the economy is growing, but the quantity of human capital is not growing as fast as it could be. Therefore, the slice of the economic pie going to each “bit” of human capital is growing very rapidly. We see this in a rising return to education, technology, general smarts etc.

At the same time are seeing massive growth in the pool of laborers. More laborers from rural China move to the city everyday and economic liberalism marches across South and South East Asia. This radically increases the pool of labor.

Labor is still relatively hard to come by, by historical standards. However, it is not as hard to come by as it once was. Moreover, increases in the return to labor are indeed increasing the supply of labor as higher wages increase the speed at which farm workers leave for the city.

This means that the global economy is growing, the share going to labor is growing slightly slower – because it is being crowded out by human capital – but the size of the labor pool is growing faster and faster. Thus, labor’s slice of the economic pie is barely keeping pace with the size of the labor pool, itself. The result is a stagnant slice per laborer.

Indeed, I think the slice is probably declining in the Western World, so that a person with no knowledge or skills whatsoever, earns less today that he would have 20 years ago.

I would guess that is similar to the  phenomenon the classical economists witnessed. Labor was migrating steadily into the city, drawn by higher wages. To some extent – though less than they envisioned –  increased wages also allowed for larger families. This meant that while the economy was growing, and with it labor’s share, the share per worker was not growing or growing very slowly.

At the same time, capital markets were highly underdeveloped. It was not easy to produce new capital. Capital’s share of the economy was increasing steadily right along with labor. However, the number of capitalists was not increasing. Thus the slice of the economic pie per capitalist was exploding.

This trend reversed itself, mainly as the result of several forces: family size stopped growing, the rural labor pool was exhausted and capital markets opened up, allowing a rapid increase in the number of capitalists and the amount of capital available.

The greatest potential source of relief for low skilled Americans will be exhaustion of the global rural labor force. This will mean primarily a fully industrialized Asia. This will exert itself in one of two ways.

If Asian countries retain their very high savings rate then it will occur as enormous foreign direct investment (FDI) in the United States. Chinese and Indian corporations will set up shop in the United States and bid up the demand for raw US labor. One might be tempted to think that this FDI will only support “skilled jobs” but marginalist thinking suggests not.

As the price of skilled workers rises some tasks will be substituted by unskilled workers. Making predictions about what this will look like is hard, especially since it involves the future. However, an one easy vision is to imagine a world where grocery stores turn into a massive “fresh counters” where all the prep work necessary for your meal is done to order from fresh ingredients. You go home with little premeasured containers that you can combine into the recipe you want as easily as Food Network chefs do.

This is a pampered life for high skilled workers, but its also a world in which unskilled workers can regularly find work capable of supporting their families and an ever increasing standard of living.

Another alternative is for savings in Asian to decline, which would shift the balance of trade and cause at least a temporary surge in manufacturing done in the US. The transition period would be different in this scenario, but the end game likely the same. There would be a bidding up of the returns to capital in the US and rather than FDI, domestic investment would bring about the future.

From a new NBER working paper by Eric Hanushek comes this shocking abstract:

A teacher one standard deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present value of student future earnings with a class size of 20 and proportionately higher with larger class sizes. Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings with a present value of $100 trillion.

There are really two important claims here. I think progressives tend to be very pleased with claims like the first one, which is that teachers have a very high value. You can find similar results in the work of Raj Chetty, which suggests that good kindergarten teachers are worth $320,000. If this is true then the marginal benefit of teaching skill -or quality, if you want to think of it that way- is far below the marginal cost, and therefore we should increase wages to draw more talented teachers.

However, the second claim is just as important and is suggested by, although not a necessary condition of, the first: if good teachers are very valuable, then bad teachers are very costly. This means we should be willing to pay more for good teachers, but it also increases the benefit of getting rid of bad teachers and ensuring we have a system that can do that.  After all, every dollar spent on a bad teacher has the high opportunity cost of good teachers.

Findings like this tell us that we should place even less relative value on teacher well-being for it’s own sake (which is separate from teacher well-being to the extent that it improves outcomes) when considering reforms. I think this is something that some progressives aren’t as happy to hear, especially with regard to using the teaching profession as a middle class jobs program.

Overall though these results reinforce one fact that progressives and conservatives should agree on: this is a really important issue.

Reihan Salam has a criticism of education policy expert Diane Ravitch that I will nominate for Blog Post of the Quarter, at least. Reihan charges Ravitch of making crude simplifications and showing overall poor analysis. This is something I’ve written about before, and quite frankly I’ve been waiting for someone with more subject knowledge than me to write exactly what Reihan has written. While there are many points Ravitch makes and Reihan dissects, the central disagreement is this: Ravitch says that the real problem with education is poverty, Reihan says that while poverty is a real problem and it has an impact on educational outcomes, there are a lot of other things we can improve in our education system that will make real differences.

To take but one example, here is Reihan countering the claim that if public schools had the same classroom sizes as they do in the Harlem Children Zone they would do as well or better:

…on the class size point, note that Shanghai, the PISA outlier this year, finds that the average class size in Shanghai is 35. That is, students in Shanghai are achieving the best educational results in the world with a teacher-student ratio of 1:35, not the 1:7.5 that Ravitch cites as the source of the success of HCZ. One has to assume that the push for smaller class sizes has helped dilute the teacher talent pool in the United States. This doesn’t mean that larger class sizes are necessarily the right answer. But it does at least suggest that Ravitch’s analytical framework is decidedly imperfect.

That Ravitch’s “analytical framework is decidedly imperfect” is, I think, the key takeaway from Reihan’s piece.

I’d like to counter one common point that Reihan quotes Ravitch making:

Instead we’re creating a revolving door where we say if you’re no good, you’re out and let’s bring in Teach For America. They’ll send in 8,000 kids to stay for two years and then they’re gone. This is no way to build a profession.

A 2008 study by Morgaen Donaldson on Teach for America has some useful numbers on this subject. Contra Ravitch, 61% of TFA recruits are teachers for longer than the required 2 years, and 24% stay teachers for at least 6 years. While this may seem low, remember that 40-50% of all teachers leave the profession within the first 5-6 years. In addition, 15% of teachers in low income schools leave those schools annually.

These number show that, as Ravitch well agrees, the status quo for attrition in public schools is not so great. So to point to tenure choices of TFA teachers as unbecoming of the profession, when those teachers are actually less than twice as likely to leave the profession in the first 6 years relative to all public school teachers, is an exaggeration.

There is a lot more in Reihan’s piece and you should really read the whole thing if you care about education reform. I’d like to see a back and forth between Reihan and Dana Goldstein on Ravitch and her analysis of the education system.

Millenocket, ME. has the right idea. Matthew Yglesias has apparently been to Millenocket, and finds what they are doing funny. I’ve never been there, but as the article points out, it’s a pretty dead town, with horrible weather…so it seems out of place:

Never mind that Millinocket is an hour’s drive from the nearest mall or movie theater, or that it gets an average 93 inches of snow a year. Kenneth Smith, the schools superintendent, is so certain that Chinese students will eventually arrive by the dozen — paying $27,000 a year in tuition, room and board — that he is scouting vacant properties to convert to dormitories.

There are three ways in which I’d like to analyze this development; from an economic standpoint, a human welfare standpoint, and a social standpoint. I will argue that all three a net benefits to the US and the world, and we should make a long-term policy commitment to this type development around the country (and, indeed, other countries should imitate it).

The economics of importing capital through education are fairly straightforward. The long run growth of an economy, given money neutrality, is a function of an economy’s real capital stock. Ceterus paribus, increasing the efficiency of capital increases the ability of an economy to grow in the long run. If the $27,000 spent on educating a Chinese child is more productive than any other investment, which means the real returns to a US education are higher than any other investment available to them (something that is almost surely the case), then this results in an increase in the marginal efficiency of capital. Whether these Chinese immigrants remain in the US, or return to China, the effect on world growth will for the better. Literally everyone will be better off due to the rising of the world Wicksellian equilibrium interest rate as China and other countries become more productive (and thus, richer).

The US is arguably much more efficient at education than the Chinese, so why not export education?

From a human welfare standpoint, consider this analysis from the World Bank:

This volume asks a key question: Where is the Wealth of Nations? Answering this question yields important insights into the prospects for sustainable development in countries around the world. The estimates of total wealth–including produced, natural, and human and institutional capital–suggest that human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.


Growth is essential if developing countries are to meet the Millennium Development Goals by 2015. Growth, however, will be illusory if it is based on mining soils and depleting fisheries and forests. This report provides the indicators needed to manage the total portfolio of assets upon which development depends. Armed with this information, decision makers can direct the development process toward sustainable outcomes.

This analysis looks at the levels of “intangible wealth” that is embedded within human and institutional capital. The US is found to have $418,009 in intangible wealth per capita (comprising 80% of our real capital stock). That means, simply by stepping within the borders of the United States, human productivity is enhanced by this massive stock of wealth embedded in our people and our societal institutions. By contrast, China has just $4,208 per capita (comprising 55% of the total wealth stock).

Now, despite the obvious material living standards present in the United States, access to intangible capital totaling more than 99 times the amount available in China, comprises a vast gain in human welfare for each and every person who comes to the United States to live and be educated.

Finally, from a societal standpoint, having more immigrant workers increases the real wage rate for most people in the US. Not only that, but it because of the increase in marginal productivity of the Chinese worker (assuming that a non-trivial sum of people will return to China), this will increase the wages of Chinese workers — which, in turn, will increase the demand from China for US-produced goods and services. A greater supply of future labor is very important to the future of the wealth creation (and thus, the welfare state), as is evident by Japan’s aging population.

So, let’s overcome this roadblock…

There is one hitch. Under State Department rules, foreign students can attend public high school in the United States for only a year, a system that Dr. Smith considers unfair, given that they can attend private high schools for four years.

…and make a real Pareto improvement in the lives of people around the world. Most of all, the lives of these prospective Chinese immigrants.

To end, a quote from Terry Given, an English teacher:

“I don’t want to sound flip,” Ms. Given said, “but why not? We won’t know until we get the opportunity to know them and give them the opportunity to know us. There’s something to be said for putting ourselves out there to see if we can be the prize that’s claimed.”


A new paper challenges the conventional  that math is a young man’s game, and also finds that the U.S. share of the global production of mathematical articles has shrunk. They summarize their findings like this:

  • Contrarily to a widely held belief (among both scientists and lay people) the rate and quality of mathematical production does not decline rapidly with age. For mathematicians who remain scientifically active, productivity typically increases over the first 10 years, then remains almost constant until the end of their career. However there is a substantial attrition rate (i.e. mathematicians who stop publishing) at all ages.
  • There is a substantial variation over time of the geographical repartition of mathematical articles. For example although the U.S. are still by far the largest country in terms of mathematical production, their share has declined from 50% in 1984 to 34% in 2006. Similarly, the share of China is rapidly increasing but it is still surprisingly low (only 3.8% in 2006).
  • International mobility is rather weak, and it is much more symmetric than could be expected, both in terms of numbers of mathematicians and in terms of “quality” measured by the output of the mathematicians who change countries.

The study also looks at individual characteristics of mathematicians to determine what it takes to become a “good” one. They found that:

  • Size does matter: large departments are good for individual productivity. However this effect is largely due to good hirings and becomes very small when authors fixed effects are incorporated.
  • Having a specialized department has a negative impact on productivity when no fixed effect is used, but this impact becomes positive with fixed effects. This tends to indicate that a narrower scope lowers the quality of hiring, but that researchers fare better in a department with colleagues close to their mathematical interests.
  • Looking at US universities, we find several interesting results. First, money does not seem to matter: even if the endowment per student has a strong positive impact when authors fixed effect are not used, it has a non-significant negative impact when these fixed effects are incorporated. This negative effect is actually significant when taking into account the fact that the university is public or private.
  • Again for U.S. universities, the fact that a university is private has a small positive effect with respect to public ones. There is also a sizable positive effect of location on the east coast relative to the mid-west, the west coast standing in between the two.


Matt Yglesias made the case recently that we should increase teachers’ salaries in order to raise teacher quality. He provides this graph showing teacher salary compared to per capita GDP in different countries:

Unfortunately for Matt, if he wants to increase teacher salaries the last thing he should be doing is telling people how much teachers make. A 2009 survey by Education Next and Harvard’s Program on Education Policy and Governance surveyed 3,000 people and split them into two groups. In the first group they found that 56% supported increasing teachers’ salaries and 46% supported increased education spending. The second group was first told the average teacher salary in their state and the average spending per pupil and then they asked them the same questions. Support for more teacher pay fell from 56% to 40% and support for more education spending fell from 46% to 38%. Apparently a majority of people favor higher teacher pay, but not when they know how much teachers currently make.

In reality the responses would probably be different if they were shown Matt’s graph rather than just told how much we spend. But the fact that people support higher education spending less when they know more doesn’t bode well for those who want to increase it.

Bryan Caplan wonders whether any movement towards more liberalized government services will counterintuitively lead to more statism in the long-run. Here is the mechanism he pictures:

1. If anything goes wrong, the market will receive all the blame.  The political backlash could easily lead to policies more statist than ever.

2. In practice, the government will never implement a transparent free-market reform.  Even an idea as simple as “give people the freedom to invest their own payroll taxes in a private account” will quickly morph into a kilo-page Congressional boondoggle.  This further increases the chance that somethingwill go wrong.  And when it does, the market will take all the heat.

I find plausible his speculation that privatizing social security could lead to policies intended to prop up the stock market, like TARP x 100. However, I have a hard time imagining how more school choice could backfire in a way that leads to more a more “statist” education system, another example that he gives.

One possibility is that states will be too lenient in the kind of schools are allowed to receive vouchers and students end up signing up for “virtual school” en masse. This in turn could lead to federal involvement in state education policy in an attempt to enforce standards. But these days organizations that oppose education reforms seem to be more powerful at the state and local level than the federal level. This means that, as it did with Race To The Top, more federal involvement seems just as likely to result in education reforms that move away from rather than towards a more “statist” education system.

My challenge for Bryan is this: tell me a conceivable story where more vouchers and charter schools lead to some sort of blowback that results in an education system that is more “statist” than the status quo.

One final interesting point is to note that this theory is a direct challenge to Tyler Cowen’s Marginal Revolution, where marginal steps in the right direction -and frequently free market ones- are all we have. I would be interested to see a response from Tyler on this.

Does education really teach you anything or is it just a status symbol that allows employers to sort individuals by pre-existing traits? Bryan Caplan has been debating this issue with his former professor, and now his coworker Tyler Cowen is joining in as well. All-in-all I find Cowen more persuasive, and think that for most countries, more education is probably better than less. However, I do want to question one aspect of his story. He argues that education allows people to reinforce their self-perceived characters in positive ways. Here is how he briefly puts it in his debate with Caplan:

Signaling models are important but they are not the only effect and of course a lot of signaling is welfare-improving for reasons of screening and sorting and character reenforcement.

It is only quickly mentioned here, but discussed at greater length in his most recent book, Create Your Own Economy (retitled, expanded, and in paperback here). The story is that education creates a framing effect which allows people to have a more positive narrative about themselves that induces better behavior. People see themselves as a college educated person, which makes them behave as they perceive college educated people to behave; perhaps reading more, working harder, attempting to be more cultured.

I completely agree with Cowen that the framing effect, or character reenforcement, of education is real. My problem with it is that it may be zero-sum, or even negative sum. It may be that the framing effect of college is simply to shed oneself of the burden of the negative framing effect of not going to college.

It is certainly a common refrain in TV, movies and yes, in real life, for non-graduates to explain some negative circumstance or inability to overcome a problem by saying “look, I didn’t go to college,” and then “I can’t…” or “I don’t…”, or some other restraint that fact places upon them. Absent such a framing effect they may believe their odds at achieving something are better, and so they would be willing to work harder at it.

One way to view this is that college sorts people into high-skilled and low-skilled pools, and then individuals perceive themselves as similar to their cohort. The perceived differences in the average skills of these pools is exaggerated because some of college is signaling, which allows those in the high-skilled pool to view themselves as higher skilled than they really are, and vice-versa for those in the low-skilled pool. For high-skilled people this induces positive behavior and for low-skilled this induces negative behavior.

This sorting would increase the disparity of outcomes between high-skilled and low-skilled individuals. Depending on the distribution of skills, a higher percent of the population going to college may increase the disparity in average skill levels between pools, and therefore the wider the disparity in framing effects. (Has this affect exacerbated growing income inequality?)

I’m completely prepared to change my mind about this, but as far as I can tell while it’s true that college creates framing effects and character reenforcement, it’s unclear whether the net effect of this is to induce overall better or worse behavior, and whether the positive effect on college graduates outweigh the negative effect on non-graduates.

A big story today is a report out by the Economic Policy Institute that criticizes value-added scores for teacher performance evaluations. Kevin Carey at The Quick and the Ed puts this challenge to the authors of the paper regarding how much weight should be placed on these measures in teacher evaluations:

The Economic Policy Institute’s new brief, which details the many concerns with and limitations to current value-added measures, says that 50% is “unwise.” However, despite EPI’s litany of concerns with value-added, the authors, who include Diane Ravitch, Helen Ladd, and Linda Darling-Hammond, conclude that: “Used with caution, value-added modeling can add useful information to comprehensive analyses of student progress and can help support stronger inferences about the influences of teachers, schools, and programs on student growth.”

But if 50% is unwise, what is EPI’s number? The paper doesn’t specify and calls for experimentation among districts. Experimentation is good. But I’d also like to see EPI’s authors and other value-added critics put their best number on the table. I doubt they will, though, because for many, that number is very close to 0%. And defending that number would be much more difficult than pointing out the flaws in value-added.

Kevin also discusses the shortcomings of value-added in a broader perspective:

Value-added measures of teacher effectiveness are not all that great…. But, and this is an enormous caveat, everything else we currently use is worse. A teacher’s years of experience, their education credentials, their certification status, the prestige of their college or their college GPA, even in-class observations. None of these measures does as good of a job at predicting a student’s academic growth as a teacher’s value-added score. Yet, we continue to use these poor proxies for quality at the same we have such passionate fights about measures of actual performance.

Carey’s two points together highlight an important question: if the weakness of the connection between value-added scores and teacher effectiveness means we should place a low weight, say 10%, on those scores for teacher compensation, than what does that tell us about the weight that should be placed on seniority and credentials? The answer has to be much less than 10%, since the evidence suggests those are far worse measures. Test scores representing 10%, and everything else that is currently used to decide pay representing less than that would be a significant improvement over the status quo. That would just mean a pay scale that is about 80% flat.

You know what, maybe you should just be reading The Quick and the Ed instead of me.

Over at Econlog, Bill Dickens is trying to convince Bryan Caplan that signaling does not explain the majority of the value of higher education. Two of his reasons why education is productive is that is has a value as a consumption good, and as consumption capital:

2. Education is a consumption good. This should be self explanatory. At the margin school may be work, but infra-marginally at least some (if not most) people actually enjoy the reading, the lectures, the homework, etc.

3. Education is not just investment in work capital, its also an investment in consumption capital and social capital. I feel much more  at home in the world due to the fact I understand certain cultural references… The  shared culture produced by the education experience expands our common  language with a lot of meaning, and that produces huge network  externalities. Knowing history does help me do my job, but it is much  more important that it allows me to make analogies that will be  understood by acquaintances.

As an explanation for why people value college, this has some appeal. As an explanation for why college has a social value, I think it’s a pretty weak defense. Grant for a moment that it is entirely factually correct, is there any reason why this should be subsidized?

For the first thing this is a terribly regressive subsidy, primarily benefitting people with above average ability and wealth. Second, if the goal is to increase “social capital” for consumption purposes this is probably the least efficient way to do it. The money would be better spent subsidizing high-minded TV shows that make audiences more literate and cultures, or providing grants for creating and broadcasting informative documentaries or books that are catered towards people who normally wouldn’t watch them or read them. You would almost certainly generate more consumption capital and welfare by providing free subscriptions to the New Yorker ($40) for 175 households than a year in college ($7,020) for one person, and it would cost the exact same.

I’m not defending the signaling theory, Bill Dickens’ theory, or any other theory of education as a matter of fact. But proponents of more education investment should not look to Dickens’ criticisms of the signaling theory education, because even if he is right education is still way oversubsidized.

The L.A. Times investigation into standardized test scores is amazing, and you should definitely be reading everything they have. The Times deserves lots of praise, especially for it’s humane but honest treatment of the teachers, for whom this must be a stressful and, for many, shameful ordeal. Consider this teacher:

Even at Third Street Elementary in Hancock Park, one of the most well-regarded schools in the district, Karen Caruso stands out for her dedication and professional accomplishments.

A teacher since 1984, she was one of the first in the district to be certified by the National Board for Professional Teaching Standards. In her spare time, she attends professional development workshops and teaches future teachers at UCLA….

Third Street Principal Suzie Oh described Caruso as one of her most effective teachers.

But seven years of student test scores suggest otherwise.

In the Times analysis, Caruso, who teaches third grade, ranked among the bottom 10% of elementary school teachers in boosting students’ test scores.

This is clearly not a lazily tenured teacher, but someone who was trying in earnest and working hard at being good at their job. She was not being protected by the union and the school district’s decision to hide these scores, she was being done harm and is one of the victims here. Good teachers want this information to make them better teachers, which you can see in her response to the news of her poor scores:

Still, Caruso said the numbers were important and, like several other teachers interviewed, wondered why she hadn’t been shown such data before by anyone in the district.

“For better or worse,” she said, “testing and teacher effectiveness are going to be linked.… If my student test scores show I’m an ineffective teacher, I’d like to know what contributes to it. What do I need to do to bring my average up?”

When you read these stories about teachers across the hall from one another, with the same population of students from the same socioeconomic background, yet performing so vastly different from each other I find it hard not to reflect on a dying notion in educational reform: that the problem is that teachers need is more resources and smaller classrooms. In the not-so-distant future it will unanimously be understood that this was a completely wrongheaded idea, and we will wonder how it could ever have been believed. It will be like price controls in the 70s, or the idea that the Soviet Union would outperform the U.S. The not-so-distant future will wonder how anyone ever thought education could be reformed when performance and pay were so disconnected, and when nobody -not even the teachers themselves- knew who was succeeding and who was failing.

Smaller classrooms and more resources without better information and incentives would be like trying to save a sinking ship by filling up the gas tank.

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