Against Free College

All things being equal, having a college degree is better than not having one. Degree holders make more money and have an easier time finding a job compared to non-degree holders. The difference between just a high school degree and a college degree is over $400 a week (about $20,000/year!). And it's an asset that needs no maintenance and can never be taken away from you. With such large benefits, why shouldn't college be free?

(Of course it's not "free." People on both sides of this argument know it's not "free." But "subsidized so much that the price consumers pay is at or near zero" is too damn long. So I'm calling it "free" for short.)

Free college is not smart policy. For one, it's not entirely clear college debt is a problem. Average debt may be high, but it's driven largely by graduate students. Median balance is just $8,500. And that's only the people who have any debt at all. (To say nothing of subsidization causing the higher tuition in the first place.) Free college is a solution looking for a problem.

But even if this wasn't true, those large internalized benefits make the argument for free college so hard: why shouldn't you pay for something you benefit so much from? Why should other people be forced to shoulder the cost of something that benefits just you? Any externalized benefits to college degrees (slightly lower rates of crimes, for example) are tiny compared to the internalized benefits. With a tertiary enrollment rate of about 90%, any additional incentive would be wasteful. Clearly, further subsidization isn't necessary to encourage people to go to college. If anything, the U.S.'s attendance rate it too high already.

If the benefits are internalized, the costs should be as well. College is the first time in most people's lives where they get to truly customize their education. This isn't merely choosing this or that AP class. This is choosing the most defining aspect of your degree: your major. It determines not only a large share of what classes you'll take, but also the skills you develop and what it says about you as a person. It's no wonder that salaries vary widely by major.

That customization derails another common pro-free college argument: people pay for their own education through the tax system. Higher income means more taxes owed, especially with progressive taxes. It's sort of like a loan. But this is an incredibly sloppy loan system, with cost nonsensically removed from payment.

Many forms of compensation are not taxable. Jobs differ with varying levels of fulfillment, work hours, flexibility, stress, prestige, and so on. Desirable jobs will have many applicants and undesirable jobs will have few. Differences in wages compensate for differences in working conditions and the fun jobs get a modest paycheck. Yet those favorable conditions cannot be taxed (how would one possibly tax the joy of being a musician?). Some simply won't pay for their education through the tax system. They will learn while others work.

College graduates don't have to be starving artists for this play out. You can live a good life and force strangers to pay for your education without having to pay for the education of strangers. It takes a lot of money in the U.S. to enter the realm of net-tax payer. Only the wealthiest Americans pay any net tax at all. Maybe there's a tax plan out there that will ensure proper payment (and that's a big maybe), but it's unlikely to be fairer than simply paying tuition.

There are already many paths in place to address the big advantage of free college: educational mobility. Increase funding for Pell grants and other programs which target low-income students. There will be more schools like Berea College which charges zero tuition and focuses enrollment on the financially strained. Payments could only be due starting the first few years after college, when incomes are lowest and most in flux. Improve secondary education and encourage trade schools so fewer students drop out (dropouts are most likely to default). We are awash in better solutions.

Not only are these alternatives less costly and more just than free college, they're also far smarter.

In Favor of Designer Babies

The ethics of designer babies--humans with an enhanced genome--was a big topic last year; I imagine it will be again this year. And I imagine most of the arguments will, again, be against. This is a problem.

The pro-ban argument hinges on inequality: only the rich could afford giving their kids the genetic advantage. There would be haves and have-not. The gap between the rich and poor would widen.

To be clear: this widening does not come from the poor will be poorer. It would occur because the rich will be richer (or at least more secure in their wealth). And those gains will not come from corruption or favorable tax laws or money from a dead relative. Those gains will come from genetic enhancements. Intelligence is the clearest candidate but other traits such as work ethic, memory, and ambition could theoretically be boosted.

This is where the pro-ban argument falls apart. If there are more people who are smarter, without anyone being stupider, that's a better world. If there are more people who have great memories, without anyone being more forgetful, that's a better world. It means more and better inventors, doctors, entrepreneurs, and all the other occupations we associate with a better world. The designer babies will grow into designer adults who will be wealthy because they made the world a better place.

Designing your baby is no different than the many other things parents do to give their kid an advantage. Smart people tend to mate with other smart people because they don't want to risk having a stupid kid. No one argues that provides an unfair advantage, though the advantage is as fundamental as genetic engineering. Reading to your child gives them a huge advantage. As does raising them in a loving household.

When it's argued that we should do these things less, it's clear how backward a designer baby ban is. Last year, philosophy professor Adam Swift claimed parents shouldn't read to their kids because some kids have parents who don't read to them. It's an unfair advantage, he says. Same with loving your kids: a stable and caring household is an unfair advantage. But, obvious to anyone who thinks about it for a few minutes, the best response isn't to read to or love your kids less. It's that people should do these things more. 

And that's the final nail in the coffin for the pro-banners. All technology starts out as only for the rich but falls in price as production improves. Costs came down for computers, for cars, for air conditioning, for cell phones. Why not for genetic engineering? Imagine a world where a cocktail of genetic improvement is as standard as an ultrasound. Where everyone is cancer-resistant, Einstein-smart, and lives to be 200. That's a strictly better world.

But it can't happen if it can't ever get started.

Keep the Olympics in Athens

Boston gave up on its bid to host the 2024 Olympics on Monday, a surprisingly wise move given the city was home to the most expensive highway project in the US: the way over budget Big Dig. Maybe the whole ordeal made Bostonians suspicious of megaprojects. And rightfully so.

Projects that cost a billion dollars or more--whether private or public--tend to take much longer and cost much more than initially estimated. It's not simply corruption. It's also just very hard to estimate these parameters.

Olympic preparation is a particular dumb megaproject. The building big, special-use stadiums is outrageously expensive. And that doesn't include the upgrades to transportation infrastructure, hotel space, and other projects. Brazil faced protests in 2014 over its spending and forced relocation efforts for hosting the World Cup and Rio's experiencing some of those same protests again over its Olympic hosting. It's no wonder economists agree that hosting the Olympics is a bad deal.

Maybe having a new host city every four years made sense in 1896, when the modern Olympics first began. There was no television. Radio was only invented the year before. But in the Information Age, a rotating host city is an anachronism.

Keeping the Olympics in Athens eliminates many of these cost problems. Yes, the infrastructure would have to be maintained but it will be far less costly than recreating it every four years. Countries would loss the ability to gain prestige from hosting the Olympics, but hopefully more cities will realize it's a bad deal and that prestige will morph into embarrassment.

Happy Fourth!

Every Independence Day, I read the Declaration of Independence. Join me, won't you?

On Foolish Correlations

James Montier and Paul Krugman are in a bit of a spat over how much interest rates matter. Krugman put forth data from FRED (Federal Reserve Economic Data) showing a strong correlation between interest rates and housing starts. But, says Cullen Roche, he left out 40% of the data, putting his whole thesis into question. A simple regression of the all the data yields an R-squared of just 0.0453 (in other words, interest rates predict about 4.53% of the variation in housing starts).

But the ultimate problem isn't the missing data but the premise. If monetary policy is effective, we shouldn't see much of a correlation between interest rates and housing starts because, by the nature of the Fed, interest rates should be low during recessions. That's one of the jobs of the Federal Reserve: keep unemployment low.

There's any number of appropriate variables you can pick to factor in market conditions but let's look at the big one: civilian unemployment. Here's the graph with civilian unemployment thrown in:

Unfortunately, it's hard to tell much from this but a regression can help. With change in interest rates AND unemployment predicting housing starts, we get:

• Unemployment
• Coefficient: -100.6
• T-Stat: -11.48 (statistically significant)
• Interest rate
• Coefficient: -22.7
• T-Stat: -5.91 (also statistically significant)
• R-squared: 0.202 (now we're explaining over 20% of the variation!)

Here's the interesting bit about this regression: Krugman transformed interest rates to be negative. Graphically, this makes it easier to see the relationship: when both lines are increasing, that means a negative correlation. Lower interest rates mean more new construction.

I didn't remove that transformation when I ran the regression. Thus the negative coefficient means positive correlation between interest rates and housing starts. So despite the incomplete approach by his critics, Krugman still appears to be wrong.

But don't throw out the demand curve just yet. New housing starts don't just respond to monetary policy; monetary policy responds to new housing starts. It is the classic causation problem that comes up in statistical analysis, especially regressions.

This is why theory is so important; it just makes too much sense that as interest rates fall, people will want to borrow more. Untangling all the effects to demonstrate that is indeed the case--and to what degree that's the case--cannot be done with something as simple as a correlation coefficient.

95.8% of Averages Are Nonsense

Sent to Marketplace today:

Your interview with Jules Pieri on the morning of May 27th concerning Title IX for business missed a crucial point. Pieri assumes that such a large gap in venture capitalist money (only 4% to women) is due to sexism.

But men tend to pursue degrees in the sciences, such as engineering and computer science. These skills more easily translate into start-up ideas compared to the softer sciences women tend to major in. Even a study NPR reported on in March found investors chose businesses proposed by men 68% of the time, not 96%. There's a lot more going on than the raw averages suggest.

Venture capitalists make money by investing in good ideas. But at the heart of Pieri's Title IX proposal is a bizarre notion: these capitalists care more about being sexist than about being profitable.

I am deeply disappointed you didn't question her on this all-too-common over-simplification.

Sincerely,
David Youngberg
Asst. Professor of Economics
Montgomery College

Poor Prioritization

Sent yesterday to NPR concerning this story.

Dear Ms. Michel Martin,
 I was disappointed when I heard your story today concerning the connection between the career of Barbara Walters and the kidnapped Nigerian girls. Rather than emphasizing the large gap in opportunity that exists between people in different countries, you focused on the tenuous gender income gap within the United States.
 As you briefly acknowledged, the comparison is complex and there are many logical reasons why women earn less. But moments later, you casually ignored that complexity and claimed a woman earns less simply because she's a women. But women earn less because of the choices they tend to make, not simply because of their gender.
 When you control for all the complexities--women tend to take more time off, they tend to pursue low-paying fields, they tend to work less dangerous jobs, etc.--the pay gap all but disappears. These complexities are at the heart of the conversation. To brush them off as you did is disappointing and distracts from more important issues.
 Attention is a scarce resource. Sexism, while terrible and still in place in modern day America, is not the most crucial issue of the day. It is, thankfully, rarer now than it was decades ago when Walters began her career. Equating the pay gap of today to the rampant anti-women terrorism in Nigeria does a great disservice. There are much more important lessons to draw from the tragic story of the kidnapped Nigerian girls.
 Sincerely,
David Youngberg
Asst. Professor of Economics
Montgomery College

Efficiency Wages Are Not Free Lunches

President Obama visited a CostCo today to champion the wages they pay their workers and boost support for increasing the minimum wage. Other businesses should follow suit, he said, as a higher wage “helps build a strong workforce and profitability over the long run.” And he's right: the main motivation for CostCo's wages is because it builds employee loyalty. Henry Ford knew this well. One hundred years ago he offered twice as much as other employers which led to boosted productivity and low turnover. But that logic does not translate to the larger economy. To use it as a justification for increasing the minimum wage is completely backwards.

Economists call the strategy an "efficiency wage." It's a wage purposely set above the market wage so they improve the pool of job candidates, retain good workers, and encourage productivity. Because it's above market wage, this high wage will attract the best workers. Because it will be hard to find a comparable wage elsewhere, they are less likely to quit and more likely to work hard.

But if everyone has a higher wage, many of these benefits disappear. It becomes an expectation, not a perk, and because everyone offers it, fewer workers will be particularly motivated by it.

If politicians think companies should embrace raising the minimum wage because it will increase their profits then they should remember that these companies don't need government permission to increase them. If they're not doing it on their own, one can only conclude it's not the free lunch the President is telling us.

Wages Are Not Special Prices

Americans are calling for an increase in the minimum wage and the airwaves and internet are filled with commentators claiming increasing the minimum wage won't have any unemployment effects, or any ill effects at all.

The problem with studies which claim there's no immediate employment effect is that they don't or can't examine other reactions to price controls. Employers could respond by cutting worker hours or hiring less (which would play out over the course of several years). They could raise prices, effectively reducing the wages of their customers. They could cut wages or raises from higher-paid workers which could hurt the underlying functionality of the business as these employees work less hard or quit. Indeed, many studies point to a real and negative unemployment effect to the minimum wage.

We know legally fixing prices make a mess of things. Pegging gas prices artificially low back in the 1970s created huge lines and massive shortages. Capping bread prices caused Washington's army to starve at Valley Forge. FDR and Hoover encouraged high prices during the Depression (on the theory that it would increase wages and employment), which helped transformed the 1930s into America's worst economic crisis in history.

Wages are prices for labor. Proponents of increasing the minimum wage are so willing to overturn over two centuries of economic thought, yet have no explanation why this particular price control won't have well-documented unintended consequences. The demand curve slopes down.

Mythbusters: Economics Edition

Robert Atkinson and Michael Lind posted a terribly foolish article on introductory economics yesterday at Salon. They claim economists tell a series of ten myths but fail at every turn. Let's look at each "myth" in turn.

Myth 1: Economics is a science. They claim that since there is disagreement in economics--citing a survey reporting 40% of economists agree increasing the minimum wage would make it harder for people to find jobs and 40% disagree--economics cannot claim to be a science.

Right off the bat, the survey they cite actually ask respondents if raising the minimum wage would make it noticeably harder for people to find work. "Noticeable" means different things to different people (hardly a scientific question) so you're going to get disagreement. Better wording yields 79% agreement.

But fundamentally, economics is a science. You might see economists disagree a lot because we like to talk about things we disagree about. Discussing points of consensus is boring, like two astrophysicists arguing if the earth revolves around the sun or the sun revolves around the earth...no one will take the latter argument. Sure, as a social science economics has more give than the physical sciences. But we still test our hypotheses and make accurate predictions.

Myth 2: The goal of economic policy is maximizing efficiency. They claim the actual goal is to create disruptive innovation which, in turn, causes inefficiency. The right allocation isn't the goal.

This is really just a misunderstanding between the short and the long run. In the short run, R&D spending might seem inefficient (and it is at some level; too much on R&D means you don't have income coming in to fund it). It's a payment without a benefit. But in the long run, it's worth it. It's an investment and smart investments result in greater efficiency.

Myth 3: The economy is a market. They claim that a great deal of economic activity takes place in governments, households, and nonprofits.

Let's be clear: a "market" is a gathering of people who engage in exchange. Conventional markets are an excellent (clean) way to illustrate how the economy works, but governments, nonprofits, and even households illustrate market activity, too. Government actors swap favors and votes. Bureaus and nonprofits compete for funds. Even households engage in specialization and exchange ("Who's turn is it to do the dishes?)

But all of this is really a minor point because the purpose of this "myth" in econ 101 is to discuss how this sort of activity plays out. Buying and selling (and producing!) in a conventional sense is clean world for students to discuss and understand. We set aside complexities for much the same reason you ignore air pressure when calculating how long it takes something to fall 30 meters in physics.

Myth 4: Prices reflect value. They point out sometimes prices don't reflect value, such as in stock markets bubbles.

This is why every econ 101 class covers externalities (when prices don't reflect value). The flaws of the Efficient Market Hypothesis is good to discuss in finance (I sometimes cover it in introductory but ultimately decided other things were more important). But the EMH is useful: most of the time, prices really do reflect value. If they didn't economists could play the stock market and be billionaires overnight. But, as any investor will tell you, beating the stock market is really, really, really hard. The EMH explains why.

Myth 5:  All profitable activities are good for the economy. They claim some profitable activities, like crony-capitalism (profits that come from political connections) and stock market manipulation, aren't good for the economy.

Again, this is why we cover externalities and monopolies and taxes and subsidies. No econ 101 course would claim all profitable activities are good for the economy.

Myth 6:  Monopolies and oligopolies are always bad because they distort prices. They claim that having a few producers can be good because of economies of scale and innovation creation.

Beyond the obvious contradiction between this myth and the previous two, most monopolies really are bad. But econ 101 covers the idea of economies of scale and it's connection to monopoly (called a natural monopoly). The value of monopolies (incentive to invent) is something I cover in my class and admittedly, I think it should be a larger part of the conversation.

Myth 7: Low wages are good for the economy. They claim high wages are good because you get workers with high productivity.

And they would be right, but ultimately wrong, because no economist claims wages should be high or low. Economists just want wages (like all prices) to be correct. See item #4.

Myth 8: “Industrial policy” is bad. They argue industrial policy can be good because governments can encourage firms to shift money to R&D and other activities with a high rate of return.

It's not that industrial policy is "bad" (again, economists argue subsidies and tariffs are useful policy tools) but that it's dangerous (because, again, crony-capitalism/corruption can get in the way of good policy). A handful of people (government agents) guiding the economy will be more corruptible and less informed than a hundreds or thousands of firms being paid for being right.

Myth 9: The best tax code is one that doesn't pick winners. An ideal tax code would encourage efficient innovation (e.g. R&D tax credit).

But most tax codes distortions are really undesirable and it is just as dangerous to invest too much in R&D than it is to invest too little. There is good reason to start with the idea of zero favoritism. To claim 101 students should consider all the nuances to slight modifications along this line is a waste of time; if students are in a position to influence policy, they can call an expert for advice and ask him/her about the devil which lives in the details. Besides, this general idea is covered in 101 anyway: in externalities.

Myth 10: Trade is always win-win. Industrial policy is the ultimate driver of what determines what a country is best at producing, not comparative advantage. "Koreans and Japanese are not good at making flat panel displays because they have a lot of sand"

I quoted that last bit because it is particularly unbelievable. The source of a country's comparative advantage isn't limited to natural resource but labor force skills and size, location, compatible industries, trade port quality, natural of government, etc. Governments and firms can foster comparative advantage in one direction or another (risky, for reasons mentioned above) but it really is all about comparative advantage.

What all this has to do with trade nor always being win-win is unclear but it's worth noting (in a nod to item #1) that economists really do have wide consensus on the virtues of free trade.

Much like any discipline, economics is a complex subject; the important stuff doesn't stop at the introductory level. If the authors feel econ 101 could use more nuance, they should remember a sizable portion of classroom time is taken up correcting the nonsense students enter the course with, nonsense reinforced by articles foolish journalists write.