Has the US been short changing education spending?

When people talk about education in the US, the one idea that receives almost unanimous support is that we need to spend more money on education.  Historical data from the BEA and the UN World Population Prospects Database show that educational investment has been rising at the same time the student age population has been shrinking relative to the working age population.

When looking at per pupil aged growth rates, the change was rather extreme in 60’s and 70’s when more women and minorities started getting access to college and has since evened out with the spending per pupil increasing at the rate of GDP.  Considering that the population is growing, this means that education spending is rising faster than GDP.

The increased investment has increase the size of the population with Bachelor degrees and high school diplomas as these charts from the US Census show:


Part of the increase is from higher current educational attainment, while part of the increase is from the older less educated population dying off. This is demonstrated by a snapshot of the Census’s 2008 data:

Education spending has held up over time, with the amount spent on the student aged population rising with GDP.  Whether or not more education spending is needed depends on whether education spending is growing aggregate human capital or if the marginal education spending is more related to signaling and status.  

Interesting charts

Nationmaster.com has some collected some rather interesting data.  Here are a few charts, presented without comment:

Check out the site, and try not to be too amused by some of the spurious correlations.

Time to go back to school?

So you are a confused college student who is having a hard time finding a job in the aftermath of the great economic recession. Should you go back to school for your Ph.D. in order to hide out until the job market gets better?  Thomas H Benton has an interesting article addressing this question for those interested in the humanities Ph.D.'s but who aren't sure that they want to go into academia.
The ranks of new Ph.D.'s and adjuncts these days are mainly composed of people from below the upper-middle class: people who believe from infancy that more education equals more opportunity. They see the professions as a path to security and status.

Again and again, the people who wrote to me said things like "Nobody told me" and "Now what do I do?" "Everybody keeps saying my doctorate gives me all kinds of transferable skills, but I can't get a second interview, even outside of academe." "What's wrong with me?"

Well, the job markets sees a few things wrong with the typical Ph.D. student compared to someone who has similar levels of IQ, openness and conscientiousness but managed to avoid getting sidetracked in graduate school.

1. They are signaling that they are not the type of person who wants to deal with the real world outside of the bubble of academia.

2. For graduate students in technical fields, they are demonstrating that they prefer prestige status over monetary opportunities. There is also the potential for status clashes with superiors in the workplace.

3. In younger Ph.D. students, the Ph.D. track is often chosen because no other track was readily apparent.  Choosing this track only to go into the workforce later on suggests that they don't really think about how the world works beyond one or two steps.

4. They spent all of their time learning how to become a professor, gave up on that, and are now competing with peers who have put the time into figuring out how to create value in the market. 

The Ph.D. drop out is much better positioned than the student who delays entering the real world by finishing their thesis. However, there are some positions such as in biochemistry where in order to have influence in the real world an advanced degree is more beneficial than harmful.

Tyler Cowen has some additional thoughts on why people get Ph.D's in the humanities.

Charting out the Greek Tragedy

First, here is the OECD data and projections on the PIIGS with revised Greece levels:

Here is the same things with some other potentially troubled countries:

It is obvious that the problem children are Japan, Italy and Greece. Greece went from being the third highest debt/GDP country to the worst of the OECD. This move occurred not as a natural progression, but with the unveiling of their past lies/bad statistics/fraud. To look at their situation going forward, the government’s underlying primary balance, the amount of money it is spending or saving before interest payments, is quite informative.

Italy is fine; it is Greece and Japan who are in trouble.  This is before including the effect of higher interest rates on the Greek budget. Every time Greece has to issue or roll over their debt at higher interest rates their actual budget deficit gets worse. Greece is planning on increasing their underlying government balance as a percent of GDP at a rate faster than any OECD country has since Denmark in 1982. Of course, when Denmark increased their underlying primary balance they had a much higher inflation rate which meant they didn’t need to make the nominal cuts that Greece is now making. Japan’s situation looks in many ways similar to Greece, but since they have control of their own monetary policy they are in a much better position.

Greece's Impact on the Euro

Greece has been in the news recently.  Greece’s economy is only 2.6% of the Euro according to 2008 data from the World Bank, so it is interesting to see its effect on the monetary zone’s currency.

The top chart shows the 5 year CDS on Greek bonds and the bottom chart is the Euro versus the dollar. The cost of protection for Greek bonds started going up at about the same time as the Euro started weakening.

However, the specifics of the currency market do not seem that panicked. Below is a chart of 1 month and 3 month EURUSD volatility. If a crisis is expected, the one month volatility will often be higher than the three month volatility.  This is not currently the case, and despite there being a problem with the Euro the market is much calmer than it was in late 2008.

The same goes for other currency crosses, with the one month volatilities of EURCHF and EURGBP crosses relatively suppressed:

The put call skew for the Euro is similarly neutral relative to past levels, so there are no more people than usual making extreme bets against the Euro or hedging their Euro exposure with out of the money options.  What is happening to Greece isn’t the problem; it is what this implies about the future and stability of the Euro.  There are a few drastic possibilities that the market might be worried about, but right now the impact of Greece on wider markets is disproportionate relative to its impact on the headlines.

Analyzing a Politically Correct Education/Economic Study

John Taylor’s blog Economics One points to an interesting OECD paperThe High Cost of Low Educational Performance, by Prof. Rick Hanushek and Prof. Ludger Woessmann.  They make projections based on the relationship between performance on international math and science PISA tests and economic growth.

The estimated coefficient on cognitive skills implies that an increase of one standard deviation in performance (i.e., 100 on the PISA scale) would yield an annual growth rate that is 1.74 percentage points higher.              

Their analysis leads to the following politically correct chart:

Except in the case of the lowest performing countries, this approach is very misguided.  While allowing a sizable fraction to achieve basic literacy is necessary, the marginal worker in an advanced economy isn’t going to help much once the network effect of a literate society is established.  By aiming to put a minimum under the PISA scores, they are changing the distribution of the variable that was found to be significant in the past. Scientific and technological progress will more often come from the inventions created by the high achievers on the far right of the distribution than the more sizable group on the left side, so just cutting off the leftward distribution changes the nature of what the PISA test scores were measuring in the first place.  Even if the share of literate population was more significant in their regression than the share of high achieving students*, the relationship between literate students and high achievers can be assumed to be relatively constant up until programs such as No Child Left Behind in the US encourage schools to favor creating the former over the latter.

The following charts from a BOE speech on Inflation and the Service Sector by Timothy Besley highlights what is wrong with trying to increase only the minimum PISA performance to raise economic growth. 

This is a chart of components of the UK service sector.  While the UK’s economy is geared more towards high end services than high end manufacturing, the principle remains the same. The low end services remain a sizable part of the economy. 

The employees at the bottom rung of the service sector are low productivity due to the nature of their industry. More investment in education the left side of the distribution might cut off some of the really bad results, but it will not result in a vastly more productive economy.  Focusing on manipulating the education scores upwards by targeting what looks like the lowest hanging fruit changes the nature of the underlying relationship.  Considering that in the US there is already an order of magnitude more money spent on special needs programs than on gifted programs, the low hanging fruit in education might just be on helping skew the educational score distribution further to the right.



* These regressions can be skewed by some cultures that excel at test scores at the expense of creativity or by looking at too broad a measure of high achieving students to accurately identify the countries with the highest proportion of superstar students. The really high achieving may also be more likely to change their country of residence, benefiting the countries that attract their human capital instead of the countries that produce them in the first place.

Don't be stupid and misinformed, chocolate is way better than vanilla

Michael Kinsley, commenting on disagreement in political discourse:

It's a free country, and people can believe whatever they want. If evidence or reason persuades them that some opinion they hold is wrong, they are free to change it. So at any given moment, we all believe that our own beliefs are correct and anyone who disagrees with us has some explaining to do. Furthermore, if I believe that evidence and reason support my own views, then I also must believe that they do not support the views of those who disagree with me.  

Three possible answers are that they are misinformed, they are thinking poorly, or they are blinded by self-interest.   

This completely misses the idea of differing values, which is among the most common reasons for political disagreement.  Jonathan Haidt has done some interesting work on this issue, which is highlighted in his 2008 TED talk.  He found five foundations of morality across cultures.

  1. Harm/care
  2. Fairness/reciprocity
  3. Ingroup/loyalty
  4. Authority/respect
  5. Purity/sanctity

Liberals care much more about Harm and Fairness a lot more than Authority, Ingroup and Purity while conservatives care about all 5 channels equally.  These are fundamental differences and bipartisanship or even political discourse in general is very difficult as long as people pretend that everyone wants the same thing and the only disagreement is on how to get there.  Politicians playing to the median voter can pretend that they care equally about every moral value, but responsible commenters should be less biased.  At the very least, pretending that the only possible way their values differ from others is that they are less selfish is not constructive discourse. 

An example of another major value premise difference is time preference, where two parties can reasonably disagree on the proper discount rate.  For this premise, it can be a little bit funny watching the debate shift, because liberals discount the future benefits to economic growth but don’t discount the damage to the environment while conservatives do the opposite.  If pressed, liberals might say they don’t believe that their regulatory or redistributive policies will slow economic growth while conservatives against environmental policies believe that environmental protection done incorrectly hampers growth and as long as there is economic growth their descendents will be rich enough to deal with any issues that come up. 

Of course, it is also true that voters from both sides of the political spectrum are drastically misinformed.

Hat tip: Arnold Kling

Living Rent Free

The housing crisis, crash and subsequent pressure to forestall foreclosures keeps people in their homes even though they aren’t making payments.  The average time to foreclosure has drastically increased during the recent recession, rising from three to six months to over a year in some cases.  This has had an interesting side effect: A lot of the marginal consumers are saving quite a bit of money on rent.  There are about 7.8 million mortgages that are delinquent or foreclosed. If average monthly payments are around $700 then these people are in aggregate potentially saving 65 billion dollars a year. This works out to 0.65% of 2009 personal consumption expenditures.  This helps explain how consumption has held up even in the face of declining credit, as the most marginal consumers who are cut off from credit are the same ones that are potentially living rent free.

Macro Mood Hysteresis

Bryan Caplan has some questions about how to apply mood to macro:

What would a full-blown mood theory of macro fluctuations look like?  Ideally it would begin at the micro level - with the individual psychology of traumatic events.  What exactly scares people, and how long do they stay scared?  Then we'd move to the social psychology of fear - how do we respond to other people's fear, and how does "social proof" affect individuals' emotional recovery? 


Empirically grounded mood theories will probably imply that fluctuations are (slowly) self-correcting even in the presence of total nominal rigidity.  The large literature on hedonic adaptation finds that even after blood-curdling experiences, normal people don't remain miserable/ fearful/ angry forever.  After six months or a year, people come to terms with what happened.  It's almost like they get bored of feeling afraid. 

Instead of focusing on hedonic adaptation, the interplay between confidence, catastrophe and engagement could be more enlightening.  One model that I have found useful is from Optimism & Pessimism: Implications for Theory, Research and Practice.  In chapter two, page 46, C.S. Carver and M. F. Scheier present a figure similar to the one below.

Optimists have higher confidence and will more often act in the face of adversity while pessimists will be less likely to put in effort if they think they are not going to succeed.  The change in effort from optimism to pessimism isn’t linear. After a certain level of negative feedback the optimist gives in to doubt and despair and stops trying and at some level of positive feedback the pessimist will decide that they have a chance and put in more effort.  This switch occurs in an area called the region of hysteresis, called such because the level of engagement depends on recent history.

During booms, the feedback investors get is generally positive and confidence is high*.  Minor downturns are generally shrugged off by the investment community and are generally seen as good buying opportunities.  The bust brings most investors down through the region of hysteresis as investors give up and decides to sell assets to protect their capital.  The reason the financial recovery is so rapid is partially due to the fact that many investors are jumping up through the region of hysteresis in the positive direction.  One reason the markets remain fragile today is that when it comes to systemic confidence, many people are still in or near their region of hysteresis where a large enough negative surprise can undo a lot of the recently regained confidence in the system.

*This is partially because the financial community consists of more optimists than pessimists, but that is a topic for another post.