Signals v Causes: High School Graduate

I often hear folks say that people with a high school diploma today cannot expect to do as well as folks did with high school diplomas in previous generations.

One cause offered to explain this is less opportunity because good manufacturing jobs have gone to machines and foreign competition.

More likely, K-12 education hasn’t evolved to teach students skills that are valued in today’s economy. I got this idea from Jeffrey Sachs, this week’s guest on EconTalk. I didn’t agree with everything Sachs had to say, but I did agree with this and recommend listening to the podcast.

Also, maybe education has evolved away from teaching such skills as curriculum designers have included things thought to enrich and broaden the students lives, but really just serve the personal preferences of those designers.

When I was truly on my own for the first time, I remember thinking how ill-equipped I was to determine something as practical as how much house I could afford, even though I did know what Keynesian multipliers were. Luckily, I educated myself by turning to personal finance magazine and books and asking friends and family. I wasn’t surprised later when it became clear with the housing crisis that many others also did not have this practical knowledge, either.

I was also annoyed that I learned in school how important it was for me to exercise my right to vote, but there was no mention about doing my homework on the issues and carefully considering who I voted for.

It is also more likely that a high school diploma, once viewed as a reliable indicator of demonstrated mastery in skills, knowledge and behaviors that were of some value to employers, is now viewed as a participation trophy — a mere bauble to add to the recipient’s trophy case — as standards have slipped and the purpose of a high school diploma have changed. 

I believe the purpose of the high school diploma was to reward the folks who tried. Somewhere along they way, however, that got too hard. We didn’t want to tell someone they didn’t deserve something because they didn’t put in the effort or meet the standard. Rather than expect them to rise up to the standard, we lowered it for them.

So true

This week’s EconTalk podcast, with guest Anat Admati, is worth a listen. She explains, in an easy-to-understand way, how recklessness about risk contributed to the banking crisis. But, I especially appreciated this quote of her’s from near the end of the interview:

It is difficult to get a man to understand something when his salary depends upon his not understanding it.

Two Davids, an Optimist and a Diamond

Something made me think about this post from February 2012 and this post from May 2012.

In the first post, I try to explain to David Brooks that his social engineering predecessors created the problem he now wants to solve and he doesn’t recognize that the easiest way to solve it is to undue what they created.

In the second post, I discuss an EconTalk podcast with guest David Schmidtz who cuts right to the nub of the problem with the you-benefit-from-society-so-I get-to-tell-you-what-to-do mindset. The key phrase from Schmitdtz that jogged my memory of this post:

Tell me at what point other people helping me made me your property.

As I re-read that post, I had a couple additional thoughts.

First, not only is the do-gooder presumptuous enough to think they are entitled to tell others what to do, but they derive that belief from what others have done, not themselves. Indeed, when they say they get to tell you to be healthy because they pay for your health care, ask how much they’ve paid so far. Ask for a receipt.

This entitlement to tell others what to do is usually based on the idea that “society” has provided roads, teachers and police protection (again, usually provided by others, not them) in which we all benefit.

But, where did roads come from? From government? From taxes?

Where did those come from?

From wealth creation. At some point in human history we became productive enough through private trading to free up some spare time for some folks to be able to work on things beyond acquiring today’s calories — like protecting us and representing us from and for each other.  Wealth creates government, not the other way around.

For more depth on that topic, I recommend Matt Ridley‘s The Rational Optimist and Jared Diamond’s, Guns, Germs and Steel.

Give the Governor Harumph!

In this week’s EconTalk podcast, guest Glenn Reynolds says well something I think about often:

 …it’s always funny to me that the people who go on the most about sustainability in other areas seem the least concerned about sustainability when it comes to things like government and spending.

Here he sums why government grows:

…there is a scene in it [the movie Blazing Saddles]–which I regard as one of the most powerful metaphors for our political situation every produced–and it’s the one where Mel Brooks, playing Governor Le Petomane, has all his cronies around a big conference table and he says: Gentlemen, we’ve got to protect our phony-baloney jobs. And the problem with making the government smaller is it threatens a lot of people’s phony-baloney jobs.

LOL

This immediately follows his plea to protect their phoney-baloney jobs:

Here Reynolds mentions what motivates politicians, something that should get more airtime:

I think it’s a mistake that a lot of economists make–not just economists but a lot of other critics of government–to think that the only question is just sort of money. I think the other issue that people guard almost as vigorously, and maybe more vigorously, is the non-monetary economy of self-importance.

Which I think for politicians is really what drives them more than anything else. I think the sense of being a big man.

It’s funny to me that it is assumed by default that CEOs are motivated by greed, but this motivation of a politician goes past society nearly undetected. Rather, politicians are often considered to be ‘serving the people’, when all they’re doing is spending other people’s money and getting their kicks out of being loved and a big shot.

Reynolds offers a nice rebuttal to a previous guest, Louis Michael Seidman’s, position that we shouldn’t be beholden to the Constitution.

If you are the President, if you are a member of Congress, if you are a TSA agent, the only reason why somebody should listen to what you say instead of horse-whipping you out of town for your impertinence is because you exercise power via the Constitution. If the Constitution doesn’t count, you don’t have any legitimate power.  …if we are going to start ignoring the Constitution, I’m fine with that; the first part I’m going to start ignoring is I have to do whatever they say.

Though, in Seidman’s defense, I think Russ and Reynolds are missing something in Seidman’s argument (even though they kind of mention it in the podcast, but don’t connect the dot back to Seidman’s argument). I hear Seidman basically saying that what ‘we’ consider the Constitution has evolved over time, without necessarily being updated through the official amendment process. I believe this is a fundamental point made by libertarian-minded folks like F.A. Hayek. Law isn’t the set of rules written on paper. That’s legislation. Law is the set of norms and customs by which people get along with one another. When legislation lines up with the customs, it looks like we are following the written rules (like stopping at red lights). But, when legislation doesn’t line up with custom, we generally ignore them (like driving 5 miles over the speed limit).

One last tidbit. Here’s Reynolds’ idea to help slow the growth of government (emphasis added — incentives matter):

…create a third house of Congress, which I call a House of Repeal, in which people run for election in which their only power is to repeal laws. And if that one house repeals a law, that law is repealed. And when you go before the voters every two or four years or whatever term you choose for it, the only thing you’ve got to run on is which laws you struck down. Because right now, one reason why we’ve got growth of big government is there is literally nobody in the government with an institutional incentive to shrink government. Courts can strike down laws as unconstitutional, and they do sometimes, but it doesn’t do anything for them institutionally to do so. The other two branches are all about making government bigger. And everybody runs for election and tells voters what they are going to do for them; it would be nice if we could have somebody run for election and tell voters what they are going to undo for them.

Constitutionless

I heard about Constitutional law professor Louis Michael Seidman’s radical-sounding argument to ignore the Constitution though the general media. I thought he was a flake.

I must admit, when I began listening to this week’s EconTalk podcast and found out that he was the guest, I nearly turned it off.

I’m glad I was lazy enough to keep it rolling. I discovered that the impression I got of Seidman through the general media was wrong (surprise, surprise).

I also discovered that his conversation was remarkably similar to part of the discussion we had in the comments of my previous post Profits and Ballot Boxes.

And, I found I agreed with Seidman on quite a lot.

For example, Seidman doesn’t believe that the unconstitutionality of a government action is a valid argument against taking that action. He thinks we should discuss the merits of the policy and decide from there. I agree. I think the founders agreed, too, as evidenced by their inclusion of Article V: Amendment. 

I would add that this applies to government action that is constitutional. Just because an action is constitutional doesn’t make it right.

Of course, there are a certain group of people who should care about the constitutionality of a government action. They’re called judges.

However, I did disagree with Seidman on some things.

Seidman made a point similar to Wally in the comments (just before the 55 minute mark): the founders are not all-knowing so and it’s arrogant to assume they could think things through for generations hundreds of year after they wrote the Constitution.

I was surprised that Seidman — an advocate for discussing merits of issues — made this point. It doesn’t matter if the founders were limited in knowledge or lived hundreds of years ago. What matters is whether the Constitution (or a specific part of it) has merit. So,it seems reasonable to consider in the discussion of merits of government action why the founders were for or against those actions, rather than dismissing their positions outright. We might learn something. To commit my own fallacy, how many of us have written Constitutions that, by and large, have kept a country growing and improving for well over 200 years?

I do recommend listening to the podcast.

Money for nothing

I learned a few things from this EconTalk podcast with guest Casey Mulligan discussing his book, The Redistribution Recession.

One argument from the right against unemployment benefits is that it encourages people to stay unemployed so they can keep receiving it.

A standard retort from the left to that argument is that the unemployment payout is so small that nobody would choose that paltry sum over getting a job.

Mulligan points out that the sum is not trivial. Here’s Mulligan from about 24 minutes into the podcast (bold is mine):

Typically before the recession, unless you are well into the upper half of earnings, when you lost a job you got half of your earnings replaced. So if you used to earn $600 a week, you’d get an unemployment check for $300 a week. And I guess you are referring to kind of that $300 dollar number–it seems $300 isn’t very big. Well, if you earn $600–I earn more than $600 myself–but if you earn $600, then $300 is not all that trivial. Number one.

…number two: There’s all kinds of taxes you don’t have to pay when you are unemployed. Payroll taxes–forget about it. You don’t pay it when you are unemployed. A big chunk of income taxes you are not going to pay when you are unemployed. So when you put all of that together, without even getting to other help you might get from food stamps or Medicaid, put it all together, before the recession about 70%, maybe a little more, of your earnings would be replaced. Not half. And that’s without getting into, like I said, other types of programs.

And when you start with 70% as your baseline–so you are going to get 70% on the old rule, and you are going to put a bunch of new rules* in there–it pushes the 70% up to 85 or 90%. I don’t think we can call that trivial any more.

*The new rules Mulligan mentions earlier in the podcast are expansions made in other programs during in the recession like food stamps, mortgage payment relief and health insurance subsidies.

So, think about these choices:

Choice 1: Get a job making 70% – 100% of what you use to make and give up 40+ hours a week. After paying taxes and paying for more of your food, mortgage and health insurance, you are really making about 50% – 80% of what you use to make.

Choice 2: Don’t get a job (or at least not an official job). Keep making 70%+ of what you use to make.This includes unemployment and other programs. Keep the 40 or more hours of free time during the week, where you might find things to do for others off-the-books for extra cash (which maybe brings you to more than what you use to make).

After learning this, the ‘the unemployment payout is so small that nobody would choose that paltry sum over getting a job’ argument seems much less compelling. I’d say that it would be more of a surprise for someone to give up Choice 2 for Choice 1.

The whole podcast is worth a listen.  There are a couple other points Mulligan makes that I’d like to mention.

One (and some of this may be a mix of Mulligan’s points and my own). Unemployment is more of a choice than a condition that folks find themselves in ‘through no fault of their own.’

He contends that use to be the social norm. If you lost a job, there was more expectation on you to not burden your fellow citizens and to do something productive. So, for example, you were expected to have been responsible and saved for a rainy day when you did have a job. You were expected to make tough choices in your own budget to trim the fat. And, you were expected to find another job and take it and make ends meet, even if it was for less pay that what you used to make. At least you were being productive, responsible and continuing to add to your own work experience and skill set that may lead to bigger and better things.

The ‘social norm’ seems to have shifted to view what you use to earn and the budget choices you made then were things you were entitled to keep and that being out of job is something that you have absolutely no control over.

Two. The cost-benefit analysis of unemployment benefits has shifted. Unemployment benefits use to be viewed as a stop-gap to help folks in transition. It wasn’t really thought of something that would help the economy. Now the benefit-side of the cost-benefit analysis includes stimulative effects to the economy. But, Mulligan does a good job of addressing that belief:

It does put money in a group of people’s hands; it takes it out of another group of people’s hands. And the net reduction in the economy is actually less spending. Because, you know, you have less work going on. So there’s less total income to be spent. And so the people who are going to suffer from that, depending on the industry they work in, they are going to see the drop in demand for what they make. And they may not appreciate my story; but they don’t understand–they need to appreciate: Why aren’t their customers spending? If you drill down to the bottom of that you are going to see that the safety net expansions are a big part of it.

Here Mulligan makes an atomic connection that so few others do. Income and spending derives from wealth creation (i.e. doing productive things), not the other way around. All unemployment benefits do is shift who is spending the wealth that is being created, so since you have fewer people creating wealth, there will be less overall spending.

In fact, this reminds me of a post of mine from 2011, Government is overhead.

Another reason we spend so much on health care

We hear lots of reasons why the U.S. spends so much on health care. But, there’s one obvious reason that I don’t recall hearing all that often.

On a recent EconTalk podcast, guest Esther Dyson offered this reason:

…one reason health care costs so much in the United States is that we are so unhealthy.

Could be.

It would be interesting to break down health care spending across various indicators of a person’s health to see if there’s anything to that.

What is profit?

I’m looking forward to listening to the latest EconTalk podcast, where an organic farmer talks about profit and how she finds her teenage workers not quite ready to earn their keep. Her theory, similar to mine, is that kids have led a life up to the point of getting their first job where things are done for their benefit, rather than them having to make themselves useful to others.

EconTalk host, Russ Roberts, posted her interesting comments about this here. It’s worth repeating:

we hire some high school kids. And they are lovely people. But usually it’s one of their first jobs, like maybe they’ve mowed the lawn for their neighbor or maybe they did some babysitting. But by and large we’re their first job. So, everything else that’s happened in their life has happened for their benefit. They’ve gone to summer camp–that was for their benefit. They’ve gone to school–that was for their benefit. We as parents certainly do everything we can to benefit our children. And then they come to me and–yeah, there are a lot of programs that go on in the summer. And that’s not what this is. This is: You are going to work, and at the end of the week I’m going to give you money; and I expect that because you are here, I will make more money. And that’s a concept that I’ve had to explain to them. And it comes in really hard. And I have to say: Why would I have you here if I wasn’t going to end up with more money? Why on earth would I have you show up every day? And they kind of start to get that this should be a mutually beneficial arrangement, not just that I shouldn’t come out even because I think of–capitalism as me making money for the aggravation of having you here. And then we get the college kids; they’ve kind of gotten that kind of concept a little better. But then I’ll say: What do you want to do when you are done with college? And they’ll say: Oh, I want to work for a non-profit. And that one makes me angry. First, it’s like, well, non-profit, that could be a hospital, that could be a–like you haven’t thought about this any more–that could be a land trust, it could be anything. ‘Non-profit’ is huge. You don’t have any more direction than that you want to work for a non-profit? But also, they are telling me that profit is bad. So, I say: Well, look around at all this stuff you see, the tractors, the greenhouses, the walk-in cooler–like all this stuff. Ralph and I could have taken that money and even if we put it in the bank in a savings account we’d have earned like a percent or something, even now. But we’ve done this, and we’re risking that–it may not work out; we may not make any money from this; we may not get back the money we put in. Don’t we deserve a little more than what we could get in a bank by doing something safe? And they say: Oh, well yeah, of course you do. And I say: Well, that’s profit. And that’s all that profit is. And: Ohhhh. And then the light dawns. But they come with no idea about how capitalism works, even though capitalism is the economic system of our country.

I’d go a step further on profit.

I think it is unfortunate that we tend to only think of profit as a financial term. This causes us to see differently the actions undertaken by profit-seeking companies from the actions we undertake ourselves to conduct our daily lives. Those evil companies seek profit. How noble I am to give my time to charity.

But, a more general definition of profit is to derive benefit. What percent of your actions do you take to derive benefit?

Why did you show up to work? Probably for the same reason companies distribute their products, to earn money.

Why don’t you devote all of your time to charity? Probably because you need to have a shelter, you need food and clothes and you want quite a few other things. Companies, too, do not give all of their output to charity because they would soon have nothing left to give.

Why did you build the patio and fire-place in your backyard, instead of giving that money to charity? You did this for the same reason companies build lounges for workers and sell their products in pleasant surroundings.

Why did you replace your aging vehicle, instead of giving that money to charity? For the same reason companies replace their aging equipment.

How are the actions you take to derive benefit different from the actions companies take to derive benefit?

There are only two key differences that I see. First, companies more carefully record the money unit benefits of their actions because they have folks who hold them accountable, the owners. Second, they are trying to accrue those benefits for someone else, the owners instead of themselves, unless they happen work for an employee-owned company.

Profit is nothing more than a derived benefit. We profit a great deal from others, that’s why we are willing to pay them. Without that profit, we’d be living the short and lean lifestyle of a hunter-gatherer.

The Will of the People does not exist

As you get older, you learn things aren’t always what they seem. A magician isn’t magical, he’s just highly practiced at misdirection and concealing what’s really happening, for example.

The idea of the Will of the People is similar. We take for granted that majority rule is a fair way to decide things. If the majority wants it, it’s the will of the people and it’s fair. Rarely do we question that.

But, in this week’s EconTalk podcast, Rodden on the Geography of Voting, this idea is put to the test. Near the end, I found the conversation on majority rule and the will of the people very interesting (emphasis added):

[Host] Russ [Roberts]: I think a lot of people have a romance about majority rule. Certainly one way that small groups of people settle disputes is they say: Well, let’s take a vote. And whatever gets the most votes wins. And I think to a lot of people that’s obviously the fairest, best way to decide stuff. And so all of these things that we’ve been talking about that mitigate that–whether it’s the Electoral College, winner take all districts–a lot of people say that’s just not the right way to do things. Everything should be decided by a majority vote. And yet, as we know from work by Kenneth Arrow and others, majority vote in the normative sense, meaning leading to outcomes we like, isn’t so strong as it seems. On the surface, nothing could be fairer than majority rule. And yet when you look a little closer you start to see that majority rule’s got some very deep flaws in it.

Guest [Rodden]: Yeah. This is one of the things that when I teach courses to undergraduates on institutions, we do this in the first or second week. It’s a very easy thing you can do to have the students give their rank ordering of their preferences for what type of pizza that they would like; you have each student rank three and then you put them together. And it’s very easy to find groups of students who have what in the social choice literature is called cycling majorities, where you can show that there is no such thing as the majority will. If I set up the institutions in such a way that there’s first a round robin tournament of pepperoni versus vegetarian and then the winner of that is paired off against sausage, I can get a different outcome than if I do the initial pairings in another way. And so I can show that whoever controls the agenda controls what kind of pizza the students are having. It’s kind of something that we’ve known since Condorcet and Arrow, the classics of social choice theory: it’s simply nonsensical to say that the majority has some kind of will that we will then translate into policy. And so the students are always sort of surprised by this. We like to believe that there is such a thing as the collective will. And I think one of the basic lessons of politics and institutions is, unfortunately, it’s possible to aggregate those preferences in very different ways in different institutions and get different outcomes. So we should[n't] attribute so much importance to something that we believe was the outcome of some kind of majority choice. Often the truth is much more complicated. Agenda control and political power are often used in getting us to the outcomes we see. It leads us to think in a different way about how we interpret the decisions that are made by legislatures and what they actually mean.

Russ: The other problem I have with “will of the people” is majority election. Whether it’s 55-45, or 90-10, the loser obviously felt differently. So it’s not the will of the people. It’s will of those who won that election, whether it’s a majority or whether it’s proportional or whether it’s this weird system we have in the United States. We don’t have referenda on every item. It’s this weird thing called the Legislature, Congress, Senate; we have committees; all this baggage, this incredible superstructure and infrastructure around the way political outcomes are coming out of our preferences. It’s not just a majority rule referendum. But the most important thing to me is that we all have different preferences. And so once you put it into a political process you are basically saying: We are going to get one outcome, and you are stuck with it–because it was the result of a vote. And I don’t see that as necessarily fair at all.

Walter Williams wrote about this, from a different perspective, in his classic Conflict or Cooperation column.

Thomas Sowell also has some excellent thoughts on the topic here .

I like how Russ Roberts finishes the thought in the podcast:

Because political decisions will struggle to reflect anything remotely like the will of the people, I want as few decisions as possible put into that sandbox. I’d rather have the competition of free association and free choice make those decisions and allow for the diversity of outcomes that private markets and private decisions have rather than political decisions, which are inevitably coercive.

Update: Here’s another post relating to the topic: Politics is a group of people making a decision for you.

Garrett Jones on EconTalk

I enjoyed the recent EconTalk podcast with guest Garrett Jones.

Here are some of his observations. On the changing role of government:

Jones: And after a crisis hits, it just changes the kind of government we have. We now have a government whose job it is to repay this enormous amount of debts. Of explicit and implicit liabilities. That is now what our government is for.

The challenge for government:

Jones: I would love to see the United States tackle its long-term entitlement crisis. In some way it makes it clear to people that the Fed government is not on the hook for everybody’s health care forever. These incredibly open-ended commitments really have to be–they are going to get curtailed one way or the other. I’m certainly in the camp of thinking that the U.S. government is not going to default, either explicitly or through inflation. But sooner rather than later would be really nice.

‘Open-ended commitments,’ is a great way to put it. It’s easy as politicians to promise these open-ended commitments because it costs them nothing. It’s easy for voters to vote for these open-ended commitments because they sounds really good.

And, the political behavior that I believe every voter should be tired of:

Jones: I think these one-year fiscal fixes are appalling. And I don’t just mean that because it’s fun to complain about it. But I think it really does hurt the government’s planning–makes that inefficient–and I think it hurts the private sector’s planning. It makes that inefficient. This is both–whether you are a Keynesian or a supply-sider, you should be appalled by this. And it’s only the politicians who need re-election, of both parties, who really don’t want to just take a hit and sign something that lasts for 5, 10, 15 years.

No joke. One of the worst things that could have happened in politics was the Budget Act and Byrd Rule modified in 1990.

As usual with government actions, the intent of these were good, but they have generated disastrous unintended consequences. This one being setting up a government that is in never-ending kicking the can down the road mode.

These rules require that a change in law and tax code that does not have a sunset provision (a time when it automatically expires and goes away with 10 years, for example), must have 60 votes in the Senate. Any law change with a sunset provision only requires a simple majority.

The intent was to make sure that any costly legislation would either need a super majority approval (meaning it’s something a lot of people want done) or an automatic expiration date that will cause a future Congress to re-evaluate the law to see if it’s something they would like to extend.

But, from my understanding, this has had two negative consequences. First, many big changes are made with a sunset provision in order to meet the simple majority requirement. Since it’s difficult for either party to get a super majority control in the Senate they settle for using sunset provisions to a law in order to pass it on a simple majority.

This is a recipe for kicking the can down the road. Since many laws in the past 15-20 years have been passed with a sunset provision, Congress now spends a good deal of time and energy determining whether to extend these things when they come up for expiration. The “Bush Tax Cuts” are a perfect example.

Politicians love these, because they can use these expiring laws as leverage to get their new changes done, which leads to endless and unproductive (for citizens) back-scratching. Want me to vote to extend the Bush Tax Cuts? Okay, vote for my  health care proposal. Or some such.

Second, this sunset provision applies to tax law changes and treats reduction in tax rates as a ‘cost’, even if the reduction helps invigorate the economy generating more government revenue in the future.

The result is we get tax law changes with sunset provisions that guarantee political drama every time they are set to expire. Instead of having Congress debating only incremental changes to an underlying stable tax code, we have debates for incremental changes on top of the ever shifting sands of the expiring provisions and folks who are even more uncertain of what their tax situation will look like a year from now.