Bryan Caplan  

My Reply to Bill - Digest Version

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The Triumph of Organized Labor... For Ye Have Signaling Always W...
While writing my final reply to Bill Dickens, I often wished I were writing six short posts instead of one long one.  My favorite could-have-been free-standing points (Bill's in quotes, I'm not):

1. Policy implications.

Further, you must believe that there is a more efficient way to solve the problem of figuring out who is fit for what type of job than running them through the educational gauntlet. I take it from your reply you think less schooling and more work is the way to accomplish this.

Right.  Some signaling is socially productive because it improves the match between workers and jobs.  But it's privately optimal for students to far exceed the social optimum. 

My preferred policy is simply to end government subsidies for education.  It might be even more efficient to go further and impose a Pigovian tax on education.  But since education is a mix of human capital creation and signaling, and government has already made a mess of things, I think the all-things-considered best approach is separation of school and state.

2. Against incredulity.

In your reply you stated that education's value added was maybe 20% of the private returns to education. Does this mean that you think fully 80% of the value of time and other resources spent on education are wasted? Wow! Given how much we spend on education and how much time we spend in school that is an enormous inefficiency!  How is that possible?

Suppose you told me that only 20% of oil production was socially efficient, because the other 80% had large negative externalities - pollution, global warming, whatever.  Would "How is that possible?" be a reasonable reply?  I don't think so.  In both cases, the point is that individuals and firms are advancing their own interests by ignoring the large negative side effects of their behavior.

3. My comfort zone.

...Bryan, I hope you appreciate the irony here. In our first public debate you are taking the side of widespread market failure while I'm defending the ability of private ingenuity to work its way around whatever problems the world throws in its way - the reverse of our usual roles. I must say I'm enjoying being in this position because I normally grant that it is the person arguing against efficiency who has the burden of proof.

It's not an ideologically comfortable position for me.  But first-hand observation of the education industry, plus the psychological evidence against the empirical importance of "learning how to learn," "training the mind," etc., leave me little choice.  On a deeper level, admittedly, I am taking a characteristically Caplanian position: Government is making a genuine market failure worse because voters systematically overestimate the social benefits of education.

4. Why signaling is stable.
To begin with, you don't have to jump all the way to the most efficient possible system in one leap. A small innovation that gives you a slight advantage should be enough to allow a private institution to prosper and shouldn't cause a big adverse selection problem as so many factors go into college choice.
This sounds very reasonable.  But reread your last sentence carefully.  If the advantage is only "slight," then a slight adverse selection problem is probably all it takes to cancel out the benefit.  So there's not much reason to be optimistic about stepwise progress to a low-signaling world.

5. Educational innovation: When it works, when it doesn't.
Your argument that innovation is impossible because of adverse selection is untenable in the face of massive amounts of innovation in the educational system everywhere.
I never said that all educational innovation generates adverse selection.  You get adverse selection when you try to make education easier - when you reduce the number and difficulty of meaningless hoops students have to jump through.   Co-ed dorms and high-tech classrooms don't attract losers.  Cutting math and foreign language requirements do.  And as I said earlier, it only takes a slight adverse selection problem to cancel the benefits of a slightly more efficient curriculum.

6. My bottom line.

I'm standing my ground.  I'm happy to admit that I've got a 10 percentage-point standard error around my "80% signaling" estimate.  But a priori arguments about how easily market forces would undermine signaling don't sway me.  I've spent too many years learning - and teaching - material that's all-but-useless in the real world.


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COMMENTS (6 to date)
Rebecca Burlingame writes:

"Separation of school and state" - what a cool phrase. What would be just as good? "Separation of healthcare and state." Sure, people could provide these things in the name of government, just so long as they are free to choose the skills they want to donate for taxation. That's a "bigger" government I could easily live with.

Tax Lawyer writes:

I think the problem is with the cost of education. And the system is so broken.

From my life I have found that my education has hindered me rather than helped me (in the job market, not in critical thinking). I went to college and majored in Accounting, got my CPA and them made the dumbest mistake I could have: I went to law school. I finished in the top 5% of my class, and after 10 years of practice, I am unemployed, and in many cases, the J.D. and bar admission actually hurt my chances of finding a job.

Last year's graduating law school class found jobs practicing law, for only 15% of students. These kids have over $100K of debt, which they can never pay back, and are non-dischargeable in bankruptcy. But lenders will be happy to fund the loans, because the government guarantees them.

The terms are so onerous that:

1. there is an automatic penalty of 25% for defaulted loans; plus

2. the collection companies charge an additional 28% of the loan balance as collection costs;

3. they can and will garnish your wages for the rest of your life;

4. they will intercept tax refunds;

5. they even get to attach your social security--this debt lasts until you are in your grave;

6. they are exempt from the Truth in Lending Act, and the Fair Debt Collections Act;

7. they allow colleges and university professors to make extraordinary amounts of money (the Dean at my law school, even though it was a 3rd tier law school, made $375K last year);

8. they cook their surveys to massively overstate graduate employment numbers (they might say that 85% of our graduates are employed after 6 months, while most are asking "do you want fries with that?");

9. parents push their kids into taking on this massive debt based on the "fact" that attorneys make a lot of money (about 3-5% do, the rest cannot pay back their loans due to lack of employment in the legal field); and

10. society pushes students to take their education as far as they can, whatever the cost, as it has been "proven" to pay off (have you ever heard a guidance counselor say "you are better off not incurring that debt, and foregoing your education)? That would lower the school's statistics measuring college enrollment, and would make the school and guidance counselors look bad--especially when added to what parents tell their kids due to "conventional wisdom".

These factors are ruining our children, and our future. When the "best and brightest" try and do their best to get ahead, and learn as much as they can, they are getting stuck with massive debts that will destroy both themselves and our future. We need to make these debts dischargeable in bankruptcy, after about 5 years.

Europe has the right solution--score high enough on standardized tests, and education is free. They invest in future generations. Here in the U.S., banks and Sallie Mae ruin people's future.

Student loan defaults are at record levels, and will only increase as far as the eye can see. Good investment--find a way to short Sallie Mae, though the government pay prevent this from working by propping up the company at the expense of students and our future.

I wish I had become a plumber, even if I was bored out of my skull.

Hyena writes:

But, at the end, your objection is that "it must be true because I don't see the path between education and productivity".

frankcross writes:

I came in late and I'm not sure I understand. But if education adds 20% in value above the private returns, wouldn't that support a subsidy of up to 20%? Rather than a tax?

And your argument against the market looks like a thousand other people's argument against the efficiency of a thousand other markets.

Ed Bosanquet writes:

You argument begins with education is mostly signaling. This is not a point I wish to concede but assuming it is true. Signaling is important because it identifies the best candidates for each job. A reduction in subsidies or a Pigovian tax would change the signal from identifying the "best at school" to the "best of people that can afford school". This would reduce the signal but then businesses are still confronted with the issue of how to identify job candidates.

Assuming education is 100% signaling and 0% human capital construction then it's entire social function is to help place individual's in a corporation. The student is clearly willing to pay the cost. The business is willing to help pay the cost through either increased wages or direct subsidy. Leaving only the amount of the governments contribution in question. The government benefits through increased taxes on the well placed individual and the more productive business. This would be the 40% tax rate (half federal, half various city and state taxes) on $1,300,000 additional lifetime earnings on college graduates or $260,000 plus taxes from the business (not calculated here). The government also benefits through a more informed citizenry (not valid if education is 100% signaling) and more content citizenry (educated people are happier).

So even if education is 100% signaling the equation seems to be this:
If
(Education subsidy) - (Increased taxes) - (better decisions by informed citizenry) - (delta happiness of educated citizenry) > 0
decrease subsidy
Else
increase subsidy

Without even considering these numbers even a 100% signaling argument is purely theoretical. Even you have admitted some skill acquisition so the cost of alternative education needs to be explored although from the government perspective this would be accounted for by the increased taxes. Skill acquisition is a non-trivial effort but not easy to discuss in this forum

To say education is only signaling and is therefor a waste seems shortsighted without considering the costs of alternative solutions to perform job placement or skill acquisition.

Rachel writes:

The signalling theory of education produces a very clear and easily testable prediction: randomly giving some children extra education will not change wages if employers know that the extra education was random.

For example, suppose that a state passes a law requiring all students to stay in school until 16. As a result, average education increases by 1 year. The law isn't secret - so employers know that new graduates are getting more education because of the law. Therefore, there's no signalling value to the extra education. Alternatively, education for one cohort might be disrupted by a teacher strike, war, etc. The lower education has no signalling value.

Economists have done a lot of studies looking at random variation. These studies are known as natural experiments or instrumental variables. The general result is that wages increase by about 10% when education goes up by 1 year. http://emlab.berkeley.edu/users/card/papers/return-to-schooling.pdf.

There are only two possible explanation for why this result works:

1) Education really does raise productivity by about 10% per year;
2)Employers are so stupid that they didn't notice the law change. In that case, a large employer could save money by hiring people who faced bad schooling conditions.

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