education

Economics of Education, Episode #23

If last week’s episode was meek, this week’s was a giant. There is a lot to unpack when talking about Education in general, and this episode goes from preschool to graduate school, all in one 10-minute lesson.

Unfortunately, this episode contained a lot of conclusions that were not backed up by full arguments (then again, you can only do so much in 10 minutes), and we’ll talk about some of these conclusions. There’s a lot to say about this episode, and we’ll be nailing the important points in this blog post. Let’s get started:

Education vs. Public Schooling

Crash Course begins this episode with a comment about how every country needs public schooling:

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Why do governments spend billions funding universal public education? Why not just let profit seeking businesses handle it? Many argue that if education was entirely privatized it’s likely that some children would be excluded, and that would make society, as a whole, worse off.

We mentioned this in Episode 21, but there is no way anyone could make this conclusion on anything but speculation. The existence of a “free” primary and secondary school option pushes private competition out of the market, so when predicting a vastly different schooling market, economists don’t have much data to work with besides their own imagination.

Let’s also look at the numbers (given by Crash Course themselves): Public schooling costs about $12,500 per student per year. In comparison, the average private elementary school costs $7,770 per student, and private high schools cost an average of $13,030.

So public school costs about as much (or more) to provide than private school, yet generally speaking, provides worse education for the students. This is why many economists promote the idea of school vouchers, where parents can spend the tax revenue that would have gone toward public schools on the private school of their choice.

Equivocation of “Education”

Immediately after talking about the need for public schooling and its positive externalities, Crash Course talks about the benefits of education in general, including mentioning that it…

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also benefits society as these individuals create art, invent cool stuff, cure diseases, and make interesting conversation at parties. More education increases productivity, GDP, and standards of living.

All of this is true, although this isn’t really an argument for state-funded education, but more for education in general. Is the public school system better at educating students in art, invention, or medicine?

Inequality

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The US has some serious problems with its education system. One of the biggest is inequality. Students from low income families tend to have lower math and reading test scores than those from higher income families. African American, Latino, and Native American students are much more likely to drop out of high school than their White or Asian counterparts.

When talking about the problems with the education system, I was surprised to see such a major focus on inequality in this Crash Course episode, especially since they already dedicated a full episode to it. I thought that Crash Course would focus on the problems with the education system (falling test scores, lack of preparation for the real world, rising tuition) and not on the racial/economic divide.

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For some economists, the best way to level the playing field is to focus on funding. They argue that the government should pay for early education programs, and provide extra money for disadvantaged and low-income students.

First, economists and sociologists are very torn on whether there’s any correlation between pre-schooling and later academic achievement, and I’m surprised that Crash Course wouldn’t mention that this is highly debated.

Second, how would sending all kids to preschool solve the inequality problem? Doesn’t the US already send all kids to school from grades K – 12, and the inequality problem still exists? Can anyone please explain how government-funded preschool solves this problem?

It’s clear that the first step to improving equality is to invest in primary and secondary education.

Crash Course has isolated the educational performance data in a box. They are surprised by how students of different races/income levels succeed at different levels, and the only solution they see is for the government to put money somewhere, anywhere in the school system.

Could it be that there are other things besides education funding that could contribute to why kids of different races/incomes are performing differently? Could it be, for example, all other life circumstances, or that parents with greater income will send their kids to private schools? It’s incredible that Crash Course doesn’t consider these other factors to be an influence on educational achievement. Keep this mind for later in the video.

As a side note, the only problem with the US education system that Crash Course mentions is one of inequality. It’s not really an economist’s place to talk about the problems of the US school system, but I think most people can think of some problems other than inequality.

College and Higher Education

Crash Course starts off their discussion about college by mentioning that those who attend college are generally self-selected privileged people:

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First, it takes a modicum of intelligence and dedication to even get into college. Second, you have to receive a fairly good primary and secondary education to be able to keep up with college work. Third, the students who attend college are more likely to come from well-off families with educated parents who have the time and energy to help encourage their success.

I’m not going to guess that ages of the co-hosts of the show, but as anyone who has attended college in the past 10 years can tell you, there are not filled with only smart people, and even if you don’t come from a well-off family (as many are not), you can still go to college with government loans.

But here is the real kicker:

The fact that college graduates make more money isn’t just about college. It’s also about life circumstances.

Why couldn’t Crash Course use this exact explanation when talking about difference in academic achievement between races/incomes? In other words, life circumstances are the best predictor of academic/financial success, not college degrees or preschool education funding.

Human Capital vs. Signaling

Does college actually increase your productive capacity, or does it just give you a nice thing to put on your resume for others to see? Crash Course tries to explain it here:

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They have compared the earnings of people who have earned 7 ½ semesters worth of college credits but didn’t graduate, to people who finished and got a degree. Both groups received about the same amount of education, so if the Human Capital theory is correct, they should earn about the same amount of money. If the Signaling theory is correct, those with degrees should earn noticeably more, and they do.

It’s no surprise to most people in their 20’s and 30’s that employers are looking for that college degree, unless you work in an area that’s really all about human capital (like computer science). For most people looking to get the standard post-grad job, the employer will look at your degree and your GPA, and that’s pretty much all you can do, unless you’ve held a big job before. If you try to apply for the job without a degree, your chances are much worse, even if you are better skilled to work the job. Since a lot more people go to college these days, having the degree is no longer a bonus, but rather it’s a huge negative if you don’t have it.

But it’s a smaller gap [in income] than you would find from just comparing high school and college grads. It seems that both theories apply.

But according to Crash Course’s earlier analysis, since privileged people (with better education/skills) are more likely to self-select into college, wouldn’t that account for the difference in income between the two groups (high school graduates and those with some college education)? In other words, since Crash Course argued the barrier between high school and college mostly divides the “at least some education/skill” and “not enough education/skills” groups, wouldn’t this self-selection explain the differences in income?

High Tuition

The rising costs of college education and the enormous amount of student debt are subjects barely covered in this episode, and yet, it has so much to do with economics.

In short, since the federal government allows students to borrow money to pay for college, regardless of the price, colleges have no incentive to keep costs low like other businesses do. They can feel free to increase tuition year after year, and the demand curve remains inelastic. In basic terms, government loans skyrocket the demand for education, and with the supply of universities staying about the same, the price has to rise. It was very surprising that Crash Course made no mention of this, even though it would have been perfect for this week’s episode.

Does your brain hurt after this episode? You’re not alone. This one was a struggle. Thanks for reading and be sure to come back every Thursday for a fresh post. And don’t forget to join our newsletter and our facebook group, and comment below!

Market Failures, Taxes, and Subsidies – Episode #21, Part 2

We’re back for the second part of Crash Course Economic’s episode on Market Failures, Taxes, and Subsidies. In this post we’ll cover the second half of the video, which talks about externalities, pollution, and the education system. Let’s rock and roll:

Negative Externalities

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Remember, sometimes markets misallocate resources because they don’t have the right price signals. There is no better example of this than what economists call externalities. Externalities are situations when there’s an external costs or external benefits that accrue to other people or society as a whole.

Market misallocation of resources is something we covered last week in episode 20, so I won’t go into it here. What Mr. Clifford is trying to say here is that markets don’t take into account negative externalities when pricing a product, since the companies don’t have to pay for these externalities.

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Let’s look at a TV factory that pollutes a river with toxic chemicals. This is definitely a negative externality […] There are also external costs associated with polluting the waterways, like dead fish, contaminated drinking water, and people getting sick […] The free market assumes that all the costs associated with producing TVs are accounted for within the price of those TVs, but, in this case, the market is wrong. The end result is a market failure because the factory is producing too many TVs.

This is a textbook example of a negative externality. An entity is directly responsible for a lot of bad things, but the entity never has to take legal responsibility for it. Something is clearly wrong here, but what’s the solution? Crash Course offers one that’s used most often:

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Economists often look to the government to step in and solve the problem. For example, the government could tax the TV factory.

The taxes will increase the cost of producing each TV, and thus reduce the supply and raise the price of each one. This bring the supply and price closer to what Mr. Clifford and many government economists have determined to be the appropriate supply/price for a TV, since according to them, the free market could not do it on its own.

While this solution may bring the supply and price closer to what the real market would be if the TV factory had to account for the negative externalities, it doesn’t clean the river, and it doesn’t incentivize the TV factory to stop polluting the river. In the end, the river is still polluted, but now the government has more money. Is this the trade off economists are looking for?

Instead, some economists suggest, the problem is one of property rights. If someone owned the river or the right to use it, he could sue the factory for violating his property rights. Since rivers are owned by governments (remember tragedy of the commons?), no private individual could sue the factory. The government is satisfied with the taxation solution since it means a new stream of cash flow, but it probably doesn’t mean much to the people who have use the polluted river. But where would the money collected from these taxes go (at least, in theory)? To the positive externalities, of course.

Positive Externalities

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More education is great for you. You’ll likely generate more income and it makes you more interesting to talk to at parties. But there are also external benefits of your education. Everyone is actually made better off. With more education you’re more likely be a positive and productive member of society. And if you earn a higher income, that means more tax revenue.

Funding education would, in theory, produce graduates with much greater productive value. This increase in value would be better off for the economy at large, since more wealth is now created. That wealth would also be taxed. If you’ve ever heard someone say that “subsidized education pays for itself,” this is the theory behind it.

Of course, this is assuming that putting money towards any school system is a good return on investment. Considering the extremely high price of college tuition, is each dollar really spent wisely on improving the productive capacity of its students?

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If the government didn’t get involved, all education would be provided by private schools that would charge tuition; there might not be enough affordable schools to educate young people. The government funds education because they think that the external benefits, like literate, well-informed, erudite citizens, are so high it’s worth forcing everyone to pay.

Well-informed, erudite citizens. Is that the world we live in? According to the most recent statistics, about a quarter of the United States is functionally illiterate.

Of course, it’s very difficult to speculate about what the market would look like if there were not any public education. The education market as a whole is so heavily influenced by the public school system, economists can only theorize about what low-cost private schooling choices would appear if they were not crowded out by no-cost public schools.

But what economists always ask themselves is “compared to what?” Would people be better off if the government put the money (wherever it comes from) toward education, some other project, or back in the hands of the citizens? That’s very hard to tell, but for spending over $12,000+ on every elementary and secondary school student, would the students would be more literate, well-informed, and erudite if that money went to private tutoring?

Thanks for sticking around for part two of this week’s episode. Please come back every Thursday for a fresh new post on a new episode. And don’t forget to join our newsletter and our facebook group, and comment below!

Episode #17 – Income and Wealth Inequality, Part 3

We’re back for the FINAL CHAPTER of this very important 3-part blog post. Here is the video if you’ve missed it. In parts 1 and 2, we talked about the causes and effect of income inequality, and today we will talk about solutions.

It should be stressed that we are now leaving the world of economics. Economics explains how X causes Y, but it does not say what X or Y should be. We are diving into the world of policy prescriptions to reduce income inequality, but since Crash Course did it, so shall we.

What Should Be Done About Income Inequality?

So, how do we address this inequality? There’s not a lot of agreement on this. Some argue that education is the key to reducing the gap. Basically, workers with more and better education tend to have the skills that earn higher income. Some economists push for an increased minimum wage, which we’re going to talk about in another episode. There’s even an argument that access to affordable, high quality childcare would go a long way. And some think governments should do more to provide a social safety net, focus on getting more people to work and adjust the tax code to redistribute income.

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I talked about this in part 2, but education (which, in the context of this episode, means schooling) often does not lead to increased skills learning. In fact, it doesn’t necessarily lead to improvements in any knowledge, skills-based or not.

In recent years, the push for more education really means greater access to government student loans. Many students are now graduating college with a increasingly meaningless degree, few skills, and a lot of debt.

However, this should not be a knock on real skill-based education. Trade schools and free online programs like Free Code Camp can actually give people the skills to create real value for an employer without all the debt associated with regular college.

High Quality Childcare

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Although Crash Course doesn’t flesh out this argument, I’m going to assume that it goes like this: a lot of households have skills and would be working, but they cannot afford childcare, so the government should supply child care for them so the parents can get out and work.

This, in theory, would work to reduce income inequality, if that is the only goal. However, you would run the risk of creating another enormous government institution that would rival the public school system. And if public schools are any indicator, they will be far from “high quality”.

Free market economists might suggest tax breaks for childcare facilities, which would allow them to reduce their costs and thus their price, making their services more affordable for people without compromising quality.

Bigger Social Safety Net

The United States currently spends more on the social safety net (as a percentage of GDP) than every other country except France, but Crash Course points out that some argue that increasing the safety net further would reduce income inequality.

Crash Course did not flesh out this argument either, but it goes like this: the safety net helps people who are unemployed get back on their feet and into the job market. If the net weren’t there, people would stay in unemployed and in poverty, and it would be harder to get back out into the job market.

However, wealth inequality has increased the greatest since the largest social welfare programs were put in place in the 1960’s. Free market economists argue that this is because the social safety net allows people to get by (in poverty) without working. Although jobs may be available, some people choose not to work, since the amount of time spent working would not be worth the marginal improvement in income (since this person would lose his/her safety net upon employment). Many economists argue that the social safety is doing more to further income inequality than solve it.

Political Scientists and Sociologists tend to dislike this economic theory about welfare spending, but it is certainly prevalent among economists. I am surprised that Crash Course would advocate for something that runs contrary to most of mainstream economic thought.

Should Something Be Done about Income Inequality?

The question economists love is “compared to what?” Crash Course speaks in depth about what income inequality is, how it’s caused, and what should be done about it, but there is absolutely no consideration given to the negative economic effects of wealth redistribution, especially since this supposed to be an economics program.

Capital

We have mentioned this in a number of other posts, but the idea of capital is really important here. Capital goods is what brings about widespread material wealth. The current abundance in automobiles, air conditioners, and even smartphones is because people invested money in capital goods, such as research and development for new technologies and machinery to make those goods more cheaply.

Redistributing income from the rich to the poor also shifts spending from capital goods to consumer goods (food, TVs, couches, etc.). As a result, less money is invested into capital goods, meaning fewer technologies are developed and made cheaply for future consumption.

Material Wealth vs. Bank Accounts

Income inequality is certainly greater than it’s ever been, but material wealth inequality is the smallest it’s ever been, which also deserves some recognition. Today the average person living in poverty might have a beat up car, while the rich person drives a Mercedes. This may seem like a significant difference today, but can you imagine what the difference was a century ago? A person living in poverty would have no car while the rich man would have a car. That’s enormous.

These improvements in material wealth come from investments in capital goods, and while wealth redistribution may be a good idea from a sociological or policy perspective, it would not be good for the future economy.

Right now, [the highest tax bracket] peaks at around 40%, but some economists call for increases up to 50 or 60%.

When any economist calls for increasing taxes, he/she is not saying that the money would be more efficiently spent by the government, but rather that the negative effects of the tax increase (decrease in capital goods investments, inefficiently spent money) are outweighed by the predicted social gains in the economist’s opinion. In these cases, the economist wears two hats: one of an economist and one of a sociologist. The economist explains how something can cause something else, without interjecting their personal policy perspectives on how society should be organized. The sociologist, on the other hand, weighs potential benefits and detriments of particular policies, and usually comes out advocating for one side or the other.

Crash Course does the same thing throughout this video. While keeping the series primarily focused on economics, Crash Course frames their questions in a way that show their sociological or political bias. The question “Should the top income tax be 40% or 60%?” eliminates any discussion about how society might be more equal (at least in material terms) with a tax rate of less than 40% (or more than 60% for that matter).

I do wish that Crash Course would distinguish their discussion of economics from their discussions of social policy proposals or morality (i.e. what “should be okay”). It would help clarify for the audience what the field of economics is, and what it is not.

Phew! What an episode. Feel free to post your thought on the episode (or my critique) in the comments section. And don’t forget to join our newsletter and our facebook group!

Episode #17 – Income and Wealth Inequality, Part 2

We’re back for part 2, and we’re just going to jump right in. Here’s the episode if you missed it:

Income and Education

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In the last thirty years in the US, the number of college-educated people living in poverty has doubled from 3% to 6%, which is bad! And then consider that during the same period of time, the number of people living in poverty with a high school degree has risen from 6% to a whopping 22%.

Crash Course jumps from discussing the causes of income inequality (see part 1) to the statistical results. I assume this is to imply that technology is widening the income gap so fast that even college graduates are living in poverty.

These numbers are designed to be shocking, and they are. Aren’t schools supposed to give students skills to be successful in real life? And shouldn’t colleges do this to a greater extent, considering students are spending tens of thousands of dollars on it?

If you’ve been to college (or high school for that matter) in the past 10 years, you already know the answer to this: High Schools and Colleges, with some exceptions, are not teaching students the skills they need to survive in the modern economy. Crash Course implicitly blames the number of high school and college graduates in poverty on technology (and other causes they cite which we’ll also get to), while there is no responsibility placed on the failings of these educational institutions.

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Over the last fifty years, the salary of college graduates has continued to grow while, after adjusting for inflation, high school graduates’ incomes have actually dropped. It’s a good reason to stay in school!

Crash Course’s argument here implies that going to college will give you steady salary growth because college classes give you the skills to get a higher paying job.

This (again with some exceptions) is not necessarily true. High-paying employers might discriminate against those who haven’t graduated from college, which would also explain the statistics. Many employers see a college degree one of the few ways to judge a candidates ability, since they often shy away from real skills-testing for job applicant since it might be considered an illegal form of discrimination.

This is not to say that someone couldn’t learn marketable skills in college. There are many areas (engineering and computer science come to mind) which actually give students the skills they need for the job market. It’s no surprise that these majors are also the highest paying for college graduates. But the majority of college students do not choose these skills-based majors.

Other Causes of the Income Gap

There are other reasons the income gap is widening. The reduced influence of unions, tax policies that favor the wealthy, and the fact that somehow it’s okay for CEOs to make salaries many, many times greater than those of their employees.

Let’s look at each of these in turn:

Unions

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Unions, by themselves, are collective bargaining groups for employees that generally demand higher wages from the employer. Originally, they served as a centralized mouthpiece for a large group of workers whose individual voices might not be heard. Their greatest power is the threat of striking if their needs are not met.

In economic theory, unions would help the employer and employees identify the market rate (what the employer is willing to pay and the employees are willing to work for), but it wouldn’t necessarily reduce income inequality. Let me give you two simplified examples:

In scenario 1 there is a company with 10 employees and 1 employer. Employees demand a $1/hour raise or they will strike, and the employer obliges, taking the money from either his own salary (which is rare) or from investor equity. The workers are paid more and there is less income inequality between the employees and employer.

In scenario 2, the workers demand $5/hour more. The company cannot afford this price and remain profitable, so they invest in machinery that will reduce the number of employees needed to 3. The remaining employees might get that $5/hour raise, or the employer might look outside of the union for employees, since it’s now easier to fill the fewer positions available. In scenario two, 7 or more employees are now being paid $0/hour, which widens the income gap.

Unions today, due to abundant legislation related to them, are not the unions of economic theory, and they if they were, they do not necessarily narrow income inequality. Although people might show you a graph of union membership next to a graph of income inequality, one can only speculate that this correlation equals causation.

Tax Policies That Favor the Wealthy

As Mr. Clifford points out later in the video, the United States has a progressive tax system, meaning that the rich pay a greater share of their income above a certain level to taxes. Occasionally, the rich may receive a tax cut. For example, the Bush Tax Cuts lowered the taxes on income over 400k from 39.6% to 35%. In this case, Mr. Clifford is 100% correct, since higher taxes on the rich (absent everything else) does reduce income inequality as a whole.

“Somehow It’s Okay for CEOs to Make a Lot More Money Than Employees”

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How about the framing of this sentence? It may not seem “okay” for someone to make more money than someone else, but as economists, the Crash Course hosts should know that wages are not decided by comparing them to other people in the company. We’ve talked about this before on this blog, but wages are decided by the amount of value you produce to the company (as a wage ceiling), as well as how much the employer (in this case the board of directors) and the prospective CEO negotiate for.

I am incredibly surprised that Crash Course implicitly argues that it’s not okay for two people to negotiate a salary irrespective of two other people negotiating a salary for a completely different position in the same company. How did this script make it passed the editors on Crash Course? Isn’t someone there an economist?

I think Mr. Clifford gets it, since later in the video he says:

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When different jobs have different incomes, people have incentive to become a doctor or an entrepreneur or a YouTube star – you know, the jobs society really values.

This doesn’t really talk about how wages are determined, but I’ll take it.

Wow guys. There is still a lot more to say, so we’re going to have to make this a three-parter. Thanks for reading and look forward to part three soon (Sunday hopefully)!

Don’t forget to join our newsletter and our facebook group!

Episode #3 – Economic Systems and Macroeconomics, Part 2

After a pretty great look at the differences between market and planned economies, Crash Course next addresses the necessary roles of government.

The Government’s Role

Mr. Clifford seems to be a fan of free markets, but only to a point:

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There are a bunch of things that governments must do because free markets won’t.

This statement would be true, even to small-government types, if you deleted one word:

There are a bunch of things that governments ~~must~~ do because free markets won’t.

Using the word must implies a subjective perspective of the speaker, since telling any party what they must do involves making judgments about what the party’s goals are. People often disagree about what they government must do, so to say that there’s anything that the government must do relies on your own political views.

Nonetheless, governments do do things that the free market wouldn’t do. I doubt anyone would argue that the free market would give money to businesses in exchange for nothing, pay people to sit in a room and do nothing because they are bad at their jobs, or spend $24 million on high-end internet routers (that only serve four computers each).

Let’s look at Mr. Clifford’s examples of things the government must do that the free market will not:

Laws, Police, and the Courts

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We need laws and police and contracts and courts to keep everything orderly.

This is probably the biggest and most essential role that defines what government is, and it is the subject of a number of books. However, for law, there are also examples of polycentric law in different parts of the world. For police, I’m sure you’ve seen plenty of private security firms, especially where the police are inadequate. And for the courts, private arbitration, mediation, and settlements already decide between 90-95% of lawsuits today. Do free markets really refuse to provide these services?

Public Goods

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We need public goods and services, like roads, bridges, education, and defense, because goods can’t get to consumers if bridges are falling down, because consumers can’t make good choices because they are not educated, and nobody really cares about the new iphone if there’s a bomb dropping on your head.

Private roads exist, and they are sometimes built where the government roads fail. But what about the roads that we use everyday, including the highways and main roads in a city? The free market does not provide for it, but would it not, as Mr. Clifford implied, if we lived in a purely free-market system? This question is the subject of so much debate that arguments about free-market roads have its own wikipedia page.

The free market certainly provides for schooling currently, and many would argue better, than government-run schooling. Education, however, does not need to cost anything.

Defense is something the free-market does not provide at all. This might be because there is not a market for an alternative national defense system (Americans pay a lot for theirs already) or because it would be illegal to create one. The free-market question to this has a complex answer (also with its own wikipedia page), but to say that the free market would not provide for this service absent a government seems dubious to me, considering a national defense would probably a highly-demanded service.

Mr. Clifford’s phrasing (these are the things the free market won’t provide) is unfortunately not supported with arguments for why the free market wouldn’t produce these things. Instead, he lists services that the government provides, most of which are also provided in the free market. The discussion of whether the free market would produce roads or defense would be a very interesting conversation, and one I hope he and Adriene delve into in future episodes.

Part 3 still to come!