Friday, April 27, 2018

Why do employers pay extra money to people who study a bunch of subjects in college that they don’t actually need you to know? Signaling

See School Is Expensive. Is It Worth It? For your kids, yes—at least assuming they graduate. But the author of ‘The Case Against Education’ says the benefits to society are vastly overstated. WSJ interview with James Taranto and economics professor Bryan Caplan. Excerpts:
"Mr. Caplan’s case against education begins by acknowledging the case in favor of getting one. “It is individually very fruitful, and individually lucrative,” he says. Full-time workers with a bachelor’s degree, on average, “are making 73% more than high-school graduates.” Workers who finished high school but not college earn 30% more than high-school dropouts. Part of the difference is mere correlation: Mr. Caplan says if you adjust for pre-existing advantages like intelligence and family background, one-fifth to two-fifths of the education premium goes away. Even so, it really does pay to finish school."

"“Why is it that employers would pay all of this extra money for you to go and study a bunch of subjects that they don’t actually need you to know?”

The answer is “signaling,” an economic concept Mr. Caplan explains with an analogy: “There’s two ways to raise the value of a diamond. One of them is, you get an expert gemsmith to cut the diamond perfectly, to make it a wonderful diamond.” That adds value by making the stone objectively better—like human capital in the education context. The other way: “You get a guy with an eyepiece to look at it and go, ‘Oh yeah, yeah, this is great—it’s wonderful, flawless.’ Then he puts a little sticker on it saying ‘triple-A diamond.’ ” That’s signaling. The jewel is the same, but it’s certified.

Suppose you have a bachelor’s in philosophy from Mr. Caplan’s doctoral alma mater, and you’re applying for a job somewhere other than a college philosophy department. What does the sheepskin signal? His answer is threefold: intelligence, work ethic and conformity. “Finishing a philosophy degree from Princeton—most people are not smart enough to do that,” he says. At the same time, “you could be very smart and still fail philosophy at Princeton, because you don’t put in the time and effort to go and pass your classes.”

As for conformity, Mr. Caplan puts the signal into words: “I understand what society expects of me. I’m willing to do it; I’m not going to complain about it; I’m just going to comply. I’m not going to sit around saying, ‘Why do we have to do this stuff? Can’t we do it some other way? I don’t feel like it!’ ” It’s easy to gainsay the value of conformity, a trait the spectacularly successful often lack. Think Mark Zuckerberg. But then imagine how he would have fared as a 21-year-old college dropout applying for an entry-level corporate job.

Mr. Caplan believes these signals are reliable, that college graduates generally do make better employees than nongraduates. Thus it is rational for employers to favor them, and for young people to go through school."

"Because educational signaling is zero-sum, and because its benefits tend to flow to those who were well-off to begin with, the system promotes inequality without creating much wealth. Research comparing the personal and the national payoffs of schooling finds a wide discrepancy—in “the ballpark of, if a year of school for an individual raises earnings about 10%, [then] if you go and raise the education of an entire country’s workforce by a year, it seems to only raise the income of the country by about 2%.” Mr. Caplan therefore reckons that roughly 80% of the education premium comes from signaling, only 20% from marketable skills."

Also see The Philadelphia Eagles' Personnel Strategy: Targeting College Grads: Six of the Seven Players the Team Drafted This Year Are on Track to Graduate by Kevin Clark of the WSJ. It seems like NFL teams see the college degree as a signal. Exceprt:
"Philadelphia's philosophy of pursuing graduates was born when Roseman, the Eagles' general manager since 2010, and Kelly, the team's second-year coach, each discovered that teams with the most college graduates are overwhelmingly successful. Kelly learned this late in his coaching tenure at Oregon, when former Indianapolis Colts coach Tony Dungy, whose son played at Oregon, mentioned in a talk to Oregon players that in the 2000s, the two teams who happened to have loads of graduates were the Colts and New England Patriots. Those teams dominated the first decade of this century.

"I didn't know he'd take it this far," Dungy said, jokingly.

In a private conversation later, Dungy, now an analyst for NBC, told Kelly that his research showed players with degrees were more likely to earn a second NFL contract and make more money. He told Kelly "the guys with degrees have what you are looking for. They are driven. If it's between two players, a degree might tip the scale. But at the time, I don't think he was even thinking of the NFL."
But before Kelly even arrived in Philadelphia, Roseman was doing his own research. Each year, Roseman and his lieutenants take the last four teams left in the playoffs and do reports on them—studying their players' height, weight, background and virtually everything else. Through those reports came evidence that the most successful teams had many college graduates on them. When Roseman and Kelly joined forces, the plan was clear.

The trends over the last five drafts are startling. Studies show that teams who select players who spent five years in college—and thus almost always have a degree—win big. Of the three teams with the most fifth-year seniors drafted, two of them met in February's Super Bowl: the Seattle Seahawks and Denver Broncos. The Jacksonville Jaguars, who went 4-12, took the fewest.

The team that drafted the most players who stayed just three years on campus? The New York Giants, who have missed the playoffs the past two seasons. The Colts, Patriots and Washington Redskins, who have five total playoff appearances in the last two years, have taken the fewest three-year players, who rarely have college degrees.

Kelly said a degree is more than proof of intelligence. "It's also, what is their commitment?" he said. "They set goals out for themselves and can they follow through for it? A lot of people can tell you they want to do this, this and this. But look at their accomplishments."

The Eagles say they want players who are prepared, and a degree confirms that. Take wide receiver Jordan Matthews, a Vanderbilt economics major whose study habits translated perfectly to the NFL."

Related posts:

A fake job reference can be just a few clicks away.

Fake Economist Fools Portugal.

Slave Redemption in Sudan. (Fake slaves are sold to those who buy slaves and then give them their freedom)

Can A Product Work Just Because It's Expensive?. (fake medicine)

If It Pays To Have Friends, Can You Pay To Have Friends?. (you can hire fake boyfriends)

Study: Half of American Doctors Give Patients Placebos Without Telling Them.

Saudis grapple with fake street sweepers .

Rent a White Guy: Confessions of a fake businessman from Beijing (by Mitch Moxley in The Atlantic Monthly)

Can adding a phantom third story to their homes help families find a wife for their son?

Friday, April 20, 2018

How Much Has Life Expectancy Improved?

A few weeks ago, one of my classes read a chapter called "The Graying of America" in the book The Economics of Public Issues. It discussed issues like social security and how there are fewer workers paying in to the system for each person receiving money than there used to be.

It also mentioned that life expectancy in 1900 in the USA was 47 and now it is 79. But much of that is because infant mortality has fallen. With fewer babies dying before age 1 or 5, that will cause the average to go up.

But what if we look at people who make it past their infancy? See Life Expectancy by Max Roser of Our World in Data. Excerpt:
"Child mortality is defined as the number of children dying before their 5th birthday. To see how life expectancy has improved without taking child mortality into account we therefore have to look at the prospects of a child who just survived their 5th birthday: in 1841 a 5-year old could expect to live 55 years. Today a 5-year old can expect to live 82 years. An increase of 27 years.

At higher ages mortality patterns have also changed. A 50-year old could once expect to live an additional twenty years. Today the life expectancy of a 50-year old has increased to an additional 33 years."
Those numbers are for England and Wales.

There is much more interesting information at that site along with some great charts and graphs.

Here are links to two other views:

Human Lifespans Nearly Constant for 2,000 Years by Benjamin Radford, Live Science Contributor.

Human lifespans have not been constant for the last 2000 years by John Hawks. He is Professor of Anthropology at the University of Wisconsin.

(Hat tip: Ashley Powell, one of my students, who sent me all these links)

Friday, April 13, 2018

Why 2017 Was the Best Year in Human History

By Nicholas Kristof of The NY Times. Excerpts:

"2017 was probably the very best year in the long history of humanity.

A smaller share of the world’s people were hungry, impoverished or illiterate than at any time before. A smaller proportion of children died than ever before. The proportion disfigured by leprosy, blinded by diseases like trachoma or suffering from other ailments also fell."

"Every day, the number of people around the world living in extreme poverty (less than about $2 a day) goes down by 217,000, according to calculations by Max Roser, an Oxford University economist who runs a website called Our World in Data. Every day, 325,000 more people gain access to electricity. And 300,000 more gain access to clean drinking water."

"As recently as the 1960s, a majority of humans had always been illiterate and lived in extreme poverty. Now fewer than 15 percent are illiterate, and fewer than 10 percent live in extreme poverty."

"Just since 1990, the lives of more than 100 million children have been saved by vaccinations, diarrhea treatment, breast-feeding promotion and other simple steps."

"the 1950s, the U.S. also had segregation, polio and bans on interracial marriage, gay sex and birth control. Most of the world lived under dictatorships, two-thirds of parents had a child die before age 5, and it was a time of nuclear standoffs, of pea soup smog, of frequent wars, of stifling limits on women and of the worst famine in history."

"it’s also important to step back periodically. Professor Roser notes that there was never a headline saying, “The Industrial Revolution Is Happening,” even though that was the most important news of the last 250 years."

Thursday, April 05, 2018

The Deficit Trials 2017 A. D.

This was a commercial back in 1986. It paints a bleak picture of America in the future, presumably caused by the growing national debt ($2 trillion then, about $21 trillion now-adjusted for inflation the 1986 figure would be about $4.4-4.5 trillion now, so we have still risen quite a bit). I think this thing is way over the top but there may be some real dangers from the debt that I mention below. You might have to watch a brief commercial for some product first. We have been covering the deficit and debt this week in my macro classes. If the embedded video does not appear, use the link below it.

Ridley Scott - W. R. Grace Deficit Trials

Real problems the national debt might cause

1. About 31% of the debt is owed to foreign citizens. When they get paid back, they come and buy American goods. That leaves fewer goods for Americans (who can't afford to buy as much due to higher taxes that were needed to pay back the debt). BUT THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE.

People borrow money all the time to buy houses and cars. Then they pay it back to a person outside of their family or household. We don’t consider this a burden since the money was put to good use. Right after World War II, the national debt was 120% of the GDP. This was much higher than it is now and we survived. No one complains that we borrowed to win the war. The national debt is about 105% of the GDP now. In 1986, the year the video was made, it was about 50% of GDP.

2. Raising taxes might hurt economic incentives. At higher tax rates, people might want to work and invest less. Fewer businesses might expand and fewer news ones created since you will get to keep less profit. But again, THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE. Also, if taxes only go up a little, and the debt is slowly paid off each year (like after WW II), it may not hurt too much.

3. We may have fewer government services in the future if we pay back the debt by lowering government spending. But this means that we are trading more government services today for fewer in the future. THIS IS NOT NECESSARILY A BAD THING IF THE MONEY IS SPENT WISELY (which everyone not might not agree on).

If taxes and interest rates are higher in the future due to the debt, that will lower our future economic growth rate. We will still probably grow, but not as much.

This site shows you the National Debt as it increases along with other interesting data

Some related links:

S&P downgrades U.S. credit rating for first time by Zachary A. Goldfarb of The Washington Post (from 2011)

The US Doesn't Deserve a AAA Credit Rating by Marc Joffe of the Fiscal Times (from 2017)

Here's Why America Will NEVER Be Vulnerable To Foreign Debt Holders by Henry Liu of Business Insider (from 2010)

"The world’s biggest net foreign debtor, by a large margin, is the U.S." See China rebalances away from bonds to buy equities, particularly in Europe by David Marsh of MarketWatch (from 2017)

Just Four Large Countries Have a Higher Debt Burden Than the U.S.