Higher Education: So Suddenly You Don't Believe in Markets?

I came across this piece in Investor's Business Daily by Alex Tabarrok (of Marginal Revolution fame) in which he argues that there are too many arts and humanities graduates and too few science, technology, engineering and math graduates (STEM). [See also this blog post]

Here is a taste:

If students aren't studying science, technology, engineering and math, what are they studying? In 2009 the U.S. graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985.

The story is the same in psychology, which graduates about 95,000 students a year, more than double the number of 25 years ago and far in excess of the number of available jobs.

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There is nothing wrong with the arts, psychology and journalism, but graduates in these fields have lower wages and are less likely to find work in their fields than graduates in science and math.

As a result, more than half of all humanities graduates end up in jobs that don't require college degrees. Baggage porters and bellhops don't need college degrees, but in 2008 17.4% of them had at least a bachelor's degree and 45% had some college education. Mail carriers don't need a college education, but in 2008 14% had at least a bachelor's degree and 61% had some college education.

Not surprisingly, these graduates don't get much of a financial "bonus" from college. A college graduate in the humanities who finds a job requiring a college degree had median annual earnings in 2009 of $21,000. For those who ended up in jobs not requiring a college degree, the median was just $14,000.

So the obvious question here - especially since the author is a conservative economist pre-disposed to believe in the efficiency of markets - is: what is the market failure here?  The incentives to go into STEM are clear, the disincentives to go into these other fields are also clear and yet student freely choose them.  Clearly, there is more to a college degree than just how it pays off in the labor market in terms of salary.  The fact that many people choose them suggests that there are sizeable non-pecuniary benefits to these degrees.  If you believe in markets, then, you should see these stats as equilibrium and evidence of the efficient distribution of degrees across the population. And if a letter carrier's life is enriched by a college degree, then it is not the economist's place to judge - preferences are personal.

But Tabarrok next makes a different and more compelling argument: if the social returns to education are much higher in STEM than in other fields, why don't we subsidize them more?

Moreover, arts, psychology and journalism graduates are less likely to create the kinds of innovations that drive economic growth.

Economic growth is not a magic totem to which all else must bow, but it is one of the main reasons we subsidize higher education.

The potential wage gains for college graduates go to the graduates — that's reason enough for students to pursue a college education. We add subsidies to the mix, however, because we believe education has positive spillover benefits that flow to society. One of the biggest of these benefits is the increase in innovation that highly educated workers bring to the economy.

As a result, an argument can be made for subsidizing students in fields with potentially large spillovers, such as microbiology, chemical engineering, nuclear physics and computer science. There is little justification for subsidizing majors in the visual arts, psychology and journalism.

I am not sure there is good evidence to support the conclusion that the social returns to education are that much higher in STEM than in other fields.  Obviously the private returns are higher, one needs only to look at the salaries quoted in the article, but the social returns are another matter.  One could make quite a strong argument (and I do) that fields like journalism provide a social return per dollar that is much higher than STEM through the watchdog role they play that limits corruption and other social inefficiencies.  Similar arguments for psychologists, artists, librarians and the like are easy to make: in fact it is quite easy to imagine that society reaps huge benefits from those that are willing to accept relative low wages to take these roles.

Finally, I don't think it is at all correct to say we subsidize these fields equally.  There are huge government investments in STEM through research support that don't exist to remotely the same degree in arts, humanities and social sciences.  This support filters down to fund graduate and even some undergraduate students as well as create capacity for more undergraduates.  It takes a lot more infrastructure to train a STEM student (well, perhaps not math) as well, so the costs are higher but tuitions are the same in general no matter your field - which is the same as an extra subsidy.

Which is all to say that I buy none of it.  Students should know the facts about the job market post-college (and my experience is that they do), and then make the individual choice about major that makes them the most satisfied given that knowledge.

The California Strategy

The Oregon Business Magazine has a very nice article on the influx of Californians to Oregon's public universities who pay out-of-state tuition and help keep us afloat. Here is an excerpt and the graph that says it all:

Out-of-state tuition dollars are saving the Oregon University System from financial strains and keeping tuition hikes lower here than in neighboring states. Since 2006, the non-Oregon student population has grown by 49% and Californian attendance has increased by 76%. This influx has become a vital subsidy for public universities, replacing vanishing Oregon general fund dollars.

“With Californians, the budget increases because they pay three times more. For every out-of-state student we are able to pay for two more Oregon students to come to school,” Diane Saunders, OUS director of communications, said. “Campuses don’t have to raise tuition to the same level” to offset general fund higher education budget cuts.

As California's budget and political problems are so intractable, it appears this is a trend that will continue for some time. But there is a point at which the state is really going to have to decide to either fund universities of give up on the idea of public higher ed for Oregonians.

Are Universities Failure Factories?

The New York Times' David Leonhardt has a provocative piece on the graduation rates of US colleges and universities. The essence is that some universities have pretty abysmal retention rates and that this represents a massive failure of the system. Now, of course, the first criticism is pretty obvious: if you want better graduation rates all you need to do is just lower the bar. A more thoughtful response is given in The Economist magazine's Free Exchange blog. In it the author points out that a lot of economic research has shown that troubles in education start early. So even though students from poorer schools might end up in universities that are lower ranked than ones in which they could have enrolled, their preparation might be very different than students form more wealthy schools - a difference perhaps not well measured by GPA and the SAT.

Looking at the chart above from the NY Times article, less selective colleges do worse than more selective colleges across the board. The explanation for this is not just the level of preparation of students (though I suspect that this has a lot to do with it), but the resources available to students who struggle academically.

I have taught at three very different places: Cornell University, Oregon State University and the University of Colorado Denver (listed in order of selectivity). At Cornell, 'at risk' students are identified before they even arrive on campus, their performance is monitored while classes are in progress and an entire office staffed with full time professionals and a cadre of student tutors are ready to serve these students. Any red flags in performance are responded to by reaching out to the individual student with offers of help. By contrast, poorly funded state campuses like UCD offer almost nothing and most students there are on campus only when they have classes and are juggling full-time or close to full-time jobs. The difference in the average preparation of students for the college academic curriculum is also markedly different. It is little wonder, then, that retention rates are very different across these two campuses. Making more resources available to students will inevitably help, but better K-12 education is just as, if not more, critical in my opinion (though this is informed opinion, nothing more - I'd love to see more data).

[Thanks to commentor Oliver for the tip]

Allocating Resources in Higher Ed

The Wall Street Journal's economics blog reports on a Webber and Ehrenberg paper that looks at the way higher education institutions allocate resources and finds that more money spent on support services improves graduation and persistence rates, especially at institutions that have low rates to begin with. They suggest that at such institutions, spending more on services and less on instruction might be a beneficial reallocation of scarce resources.

Now I haven't read the paper other than the abstract and what the WSJ reports (once victim of reduced budgets at state universities - no access to NBER working papers), and I know Ron Ehrenberg and he is an excellent economist (and one of the nicest guys you'll ever meet), but one problem jumps out at me immediately and it is not one that has an easy control in the statistical examination of the data. It may well be that increased spending on student services, especially for schools with a large population of struggling students can lead to a dramatic improvement in drop out rates and graduation rates. I have no problem believing this finding. At such schools, this effect may be larger than the impact of an extra dollar spend on instruction. But making the logical leap that perhaps resources should be taken away from instruction and put toward student services is tricky.

Here is the problem in my mind: an instructor with too many class and no job security has a very clear incentive to make the class easy for students. It significantly reduces headaches from having to give extra help to struggling students and has a direct and dramatic impact on student evaluations of the teacher - which help when it is time to renew contracts. [As an aside, I once asked a group of students who were all raving about a particular class and instructor what they liked about the class so much, their response was that it was the easiest class at OSU and everyone got an A - this was apparently a legendary class among undergrads, everyone wants in. Sigh...] So the increase in success rates from spending more on outside the classroom services could be because these services are so useful or it could be because the drop in allocation for the classroom (read more instructors and fewer professors) have made passing classes and graduating easier.

In other words an easy way to improve 'success' rates in any endeavor is to make it easier, but is this really benefitting students? I am all for increasing student services, but we have already ventured too far along the instructor track in my view. It is not, by the way, that instructors are bad teachers, they are generally exceptional. But incentives matter, so we should be making these instructors professors.

Economists Notebook: Why Higher Education Matters

On the eve of Oregon State's graduation ceremony (congrats grads!), and on the precipice of a fiscal cliff over which Oregon's public universities and university students are about to fall, it is worth remembering why it all matters.

This outstanding article from Goldin and Katz provides a nice and reasonably accessible synopsis. Here are the main points nicely summarized:

The American Dream has been placed on hold. Putting aside the recent financial meltdown and the current recession – if you can – the main reason is an educational slowdown. For most of American history, the average American child was far more educated and better off financially than his parents. But ever since the 1970s, US growth in educational attainment for successive generations has substantially slowed. The slowdown in education spells trouble for economic growth and economic inequality, as many authors have noted, e.g. Heckman (2008).

An educated populace is a key source of economic growth directly, through the improved productivity of workers, and indirectly, by spurring innovation and aiding the diffusion of advanced technologies. Broad access to education was a major factor in US economic ascendancy and in the creation of a broad middle class. The American Dream of upward mobility both within and across generations has been tied to educational access.

Ever since the beginning of the twentieth century, technological change has operated to increase the relative demand for educated and skilled workers. In academic parlance, technological change has been “skill-biased” – smart machines require smart workers. Technological change increases the relative demand for skilled and educated workers, but educational advance increases their relative supply. This “race” between education and technology can produce rising, declining, or stable levels of economic inequality.

US economic inequality has been on a roller coaster ride during the past century. Wage inequality and educational wage differentials decreased from around 1910 to 1950. They remained fairly stable until about 1980, after which economic inequality soared. The contrasting descent and rise of economic inequality in the twentieth century is linked to the history of educational attainment.

Here is the picture worth, in this case, probably about ten thousand words:

Source: U.S. Census Bureau, Historical Income Tables, table F3, updated September 15, 2006.

Note: The figure plots the annual percentage growth rate in mean real family income by quintile and for the top 5 percent of families for 1947 to 1973 and 1973 to 2005. Incomes are converted to constant dollars using the Consumer Price Index Research Series (CPI-U-RS). The income concept used is the official U.S. Census Bureau measure of pre-tax, post-transfer money income.

What this graph shows is how, since the mid seventies, economic growth has been concentrated in the wealthier quintiles. What Goldin and Katz state quite convincingly is that this is an education story, full stop.

As Goldin and Katz note: "For most of American history, the average American child was far more educated and better off financially than his parents. But ever since the 1970s, US growth in educational attainment for successive generations has substantially slowed." In Oregon this trend has already reversed and is only getting worse. To me what this means is that Oregon's future economic prosperity is increasingly going to be tied to well educated immigrants from other states and that native Oregonians are going to find themselves increasingly poorer relative to those immigrants.

Education: General Skills and Mobility

In my upcoming post on education I will focus on an in-depth discussion of the new book by Claudia Goldin and Larry Katz "The Race Between Education and Technology." But as I have been reading through the book and thinking about the myriad of issues raised therein I happened upon a blog post by Stanley Fish (or Morris Zapp in his fictional form).  In this post, Fish wonders whether the ideal of learning for learnings sake is dying out as universities face the decline in state support and are under more pressure to become more directly vocationally based.   

In Goldin and Katz, they examine the nature of the US higher education system and its emphasis on general knowledge as opposed to, and quite distinct from, Europe in the twentieth century which was largely focused on specific vocational training.  They argue convincingly that this emphasis on general knowledge was beneficial to the US because of its high degree of occupational and and locational mobility (again quite different from Europe).  Citizens with skills and knowledge are more flexible and able to deal with changing technologies, a changing economy and workplace disruption.

So what does the twenty first century look like to you?  A era where you want to see kids invest in very specific skills ready to remain in one profession for the entirety of their lives, or an era where you want to see kids instilled with the knowledge and aptitudes that make them adaptable and able to change with a changing economy?  

I prefer the latter.  

Education, Part 2: Higher Ed

Finally, after many delays it is time to get off my duff and post the next installment of the education series that I have promised. Today I want to focus on Higher Ed and how the state should think about its investments in different types of higher ed. I am not suggesting there is a zero-sum game here (in fact the opposite is true, they are all strong complements), but there is often a debate about priorities in tight budget times, and it is useful them to think about objectives and how to effectively reach them.

This is a particularly good time to write about this as there have been a number of high profile pieces in the media about public higher ed in Oregon. Dave Sarasohn’s opinion piece in the Oregonian today is one, the OPB “Think Out Loud” two-part show with the presidents of EOU, OSU, PSU and UO is another (they don't seem to have a link to the second hour), and Tom Potiowsky’s address to the Portland City Club on Friday is a third.

So how should we think about higher ed and the growth of the state’s economy. Virtually no economist has thought about this more than Philipe Aghion of Harvard University. He started with theoretical work and has now moved into examining the theory with empirical evidence.

Like I did last time I am going to use one paper as a focal point. Aghion, et. al., "Exploiting States' Mistakes to Identify the Causal Impact of Higher Education on Growth." (The link is to the shorter version of the paper). The title refers to the fact that since we expect growth and investment in higher education to be correlated, so it is hard to isolate causal the link between investment in higher education and subsequent growth caused by that investment.

The essential message from his work is this – you can be a innovator or an imitator. Innovators drive economic growth and imitators play catch up. Silicon Valley is full of innovators, the Silicon Forest, I would argue is full of imitators. What Aghion argues is that if you want to be innovators - which we very much want to be in terms of green technology - then you must invest heavily in higher education, but not just higher education, graduate research universities.

There is another side of course, if you are not going to be at the frontier (and you can do pretty well being an imitator), then it is potentially wasteful to spend too much on this type of higher ed and you would do better investing in undergraduate only universities and community colleges. Please keep in mind that the latter are not unimportant even if you are an innovator, it is really about the question: should a state prioritize investments in graduate research universities? If you are an imitator state, the most bang for the buck in terms of growth effects of education spending is two and four year undergraduate education, but if a state is on the technological frontier then the biggest bang for the buck is in graduate research institutions.

There is also a positive feedback effect in that if a state establishes itself on the technological frontier it will get the benefit of in-migration of highly skilled individuals (and thus reap the benefit of out of state investments in human capital). It also exacerbates the difference between leader and follower states. So if you can become an innovation state, you get into a self-reinforcing cycle. This helps explain the long dominance of Silicon Valley (and California in general) in high tech.

Arguably Oregon has made large strides to establish itself on a few frontiers: there is no doubt that the Portland areas has become a place of in-migration of highly artistic and creative types and the city has established itself as a center for design and advertising. The state has tried to establish itself on the frontier of computer technology (the Silicon Forest) but success here has been minimal and it seems pretty easy to argue that in high tech the state is still in the imitator category (and the link with this and the underinvestment in higher ed is pretty clear – you can’t depend entirely on in-migration, you have to create talented people at home as well).

Through innovative statistical analysis the authors of the current paper find that a thousand dollars per person in additional spending on research universities raises a frontier state’s per-employee annual growth rate by 0.269 percentage points but only 0.093 if that state is an imitator state. Conversely a thousand dollars per person in additional spending on undergraduate education in four year colleges raises imitator states annual growth rates by 0.198 percentage points but innovator states growth by only 0.053. They also find that migration accounts for about half the difference between the frontier and far from the frontier states. [And, by the way, lest these seem small, remember with national annual growth rates of about 2.5% over the last 50 years, something that increases growth by a quarter or half a percent is a ten to twenty percent increase in growth rates – pretty huge and it is hard to imagine another investment as effective at doing this] And though the argument may be made that in tight budget times it is necessary to focus on K-12, it is worthwhile to remember that with good economic growth come the resources for future investments in K-12.

The message for Oregon seems clear: if we are serious about being an innovator state in green technology or anything else, we need to invest in its research universities. Tax breaks and inspiring speeches are not enough.