Is Higher Education a Good Investment?--Posner's Comment

Becker marshals convincing evidence that people who have more education have on average higher earnings and that the spread has been growing. But it is a bit of a leap to conclude that there are high (and increasing) returns to education. Correlation is not causation. Suppose what are increasing are not the returns to education but the returns to intelligence, and suppose that people with high IQs both enjoy education more than other people do and are more likely to be admitted to college or a graduate or professional school because teachers prefer teaching (and learning from!) them and because good students are more likely (because they are more intelligent, not because they are good students) to be affluent, and therefore generous, alumni. Now if this is correct, one might expect many intelligent people to bypass college, because it is so costly; but few do. However, colleges and graduate (including professional) schools provide a screening and certifying function. Someone who graduates with good grades from a good college demonstrates intelligence more convincingly than if he simply tells a potential employer that he's smart; and he also demonstrates a degree of discipline and docility, valuable to employers, that a good performance on an IQ test would not demonstrate. (This is an important point; if all colleges did was separate the smart from the less smart, college would be an inefficient alternative to simple testing.) An apprentice system would be a substitute (and there is evidence that in Germany it is a highly efficient substitute), but employers naturally prefer to shift a portion of the cost of screening potential employees to colleges and universities. Because those institutions are supported by taxpayers and alumni as well as by students, employers do not bear the full cost of screening. These points are consistent with higher education being a good private investment, but do not suggest that it is either a particularly good social investment (it does improve matching of employees to employers, but at great cost) or that its value has much to do with the institution's educational program. Another good that higher (or for that matter lower) education provides is the creation of social networks, consisting of the students who get to know each other. They learn something from associating with other intelligent kids and they form friendships with them that may carry over into adult life and become business or professional relationships that enhance the graduate's income. Again that would be a benefit having little or no connection with the school's educational program. There may be little value added by the program to the contribution that attending college makes to a person’s income. Orley Ashenfelter, Alan Krueger, and many other economists have worried about the possibility that the correlation between education and earnings is not causal and have tried a variety of ingenious methods for correcting for differences in ability, such as comparing the earnings of twins who have different amounts of education, on the theory that they have similar native ability, or comparing the earnings of people who have different years of schooling just as a function of the arbitrary age cutoffs that determine when one starts school, or seeing whether an increase in the age at which students are permitted to drop out is associated with an increase in the earnings of that cohort compared with its predecessors. Some studies correct for performance on standardized tests assumed to measure intelligence rather than knowledge. Most studies find that education has a substantial effect on earnings independent of native ability, and the convergence is impressive. However, the studies are convincing mainly about the benefits of precollege education. I am skeptical that it should be a national priority, or perhaps any concern at all, to increase the number of people who attend or graduate from college. Presumably the college drop-outs, and the kids who don't go to college at all, do not expect further education to create benefits commensurate with the cost, including the foregone earnings from starting work earlier. This would be an entirely rational decision for someone who was not particularly intelligent and who did not anticipate network benefits from continued schooling because the students with whom he would associate would not form a valuable network of which he would be a part, either because he could not get into a good school, in the sense of one populated by highly promising students, or because if he did get into a good school the other students in the school would not consider him worth networking with. This assumes that enticing the unwilling or the unmotivated to attend or complete college would not confer social benefits in excess of the private benefits (which I suggested in the preceding paragraph would probably exceed the private costs). But the marginal students are unlikely to be kids who, with a little more education, would make the kind of contribution to society that a worker is unable to capture in his wage. Nor are these marginal students likely to be educated into an interest in political and societal matters that will make them more conscientious voters or otherwise better citizens.

Comments

[Garth]

"I am skeptical that it should be a national priority, or perhaps any concern at all, to increase the number of people who attend or graduate from college. Presumably the college drop-outs, and the kids who don't go to college at all, do not expect further education to create benefits commensurate with the cost, including the foregone earnings from starting work earlier."

Spoken only like someone from WAYYYYYYYYY up top on the Ivory Tower. How about kids that would like to go to college but can't afford to, perhaps because of their parents' lack of income or support. Sallie Mae can only take one so far - and at a cost at that. What's so hard to understand that by reducing that cost, might entice kids who are eager to learn, to go to college.

Beyond that, Posner apparently thinks there are only two reasons students go to college: future income and networking (that leads to future income). Again, this thinking is consistent with someone of the Ivory tower. I know plenty of kids that go because their friends go, or go for the social aspects of college (beyond 'networking'), or go just to get away from the folks in an envronment that does not leave them entirely independent or alone.

Here is a bit more elitism:

.... "This would be an entirely rational decision for someone who was not particularly intelligent and who did not anticipate network benefits from continued schooling because the students with whom he would associate would not form a valuable network of which he would be a part, either because he could not get into a good school, in the sense of one populated by highly promising students or because if he did get into a good school the other students in the school would not consider him worth networking with"

Here Posner is not so subtely saying that stupid kids (and they do exist I admit) won't socialize or network with smart kids. Such a naive statement leaves me to wonder if Posner himself has actually ever been to college??? Even stupid kids have appeal either in terms of looks or actions or charisma. I know a few stupid salesmen that seem to always be the life of the party. I have a few stupid friends: they make up for that drawback in other ways. Also, the idea that lower-end grad schools might not have just as signficant number of networking capabilities as say a Harvard or a Princeton is ridiculous.

Finally, Posner says:
"Nor are these marginal students [who might go to school if given funding etc] likely to be educated into an interest in political and societal matters that will make them more conscientious voters or otherwise better citizens."

That may or may not be true on average. Data? I seem to recall Bill Gates was a drop out.........

[Gartg]

"I know plenty of kids that go because their friends go, or go for the social aspects of college (beyond 'networking'), or go just to get away from the folks in an envronment that does not leave them entirely independent or alone."

I want to elaborate on the comment I made before I go to bed in anticipation of comments like, "but why should we subsidize those kinds of people?"

I would respond 3 ways:
1. Those reasons stated above are often combined with the economic reasons for attending college

2. Students may go largely for the above reasons- to allow kids to 'find themselves.' But in doing so, they might find they are really good at a particular field (even if they are "stupid" academically all around on average).

3. It seems there could just as well be social benefits to kids going to college not just for future income. It can act to ease them into the world. It can expand social skills necessary in all types of life situations not just job situations. This would be an interesting topic to study if it hasn't been already....

Finally, "stupid" as has been used so far means academically stupid. But "stupid" people with low IQs can be some of the smartest business people around in the real world. A little nurturing of that gift via college can go a long way.

ok, that's all my thoughts on this topic.

[Mark V Wilson]

Many parents want their children to go to college regardless of the child's intelligence (within reasonable bounds at the lower end of the distribution of intelligence). In this case the unit of economic analysis is not entirely the individual but almost always partly the household and involves difficult to analyze inter-generational relationships that are not entirely susceptible to simple notions of utility. However, it would be interesting to see if anyone has done studies on the effects of community college education, which is filled with people not able, because of language, prior academic performance, income, family situation, poor test scores, etc. from attending traditional 4-year colleges.

[MTW]

A major problem Posner makes is not distinguishing the students. While it is true that college acts as a screening device for some students, it is essential in thought modification for the engineering and sciences.

It takes at least 3 years to teach someone to think like a scientist or engineer. There are whole philosophies dedicated to specific fields beyond the scientific method.

History is rife with examples of people applying techniques from other fields to their own. I submit that employer education would only focus on the specific field and not include these others. This does not even address the lack of lifetime employment and the plummeting of the average number of years worked at a single company.

It is very common when additional incentives are introduced to increase the attendance of various elite programs, the average quality of the attendee is reduced. This is because the incentives are not perfect and result in non-optimal attendees joining the program. It is not a question of unqualified attendees, but that the incentives appeal to both the qualified and unqualified. The uninterested and qualified have demands or requirements that require a higher incentive than the current one. This is especially important when it requires advanced education to differentiate among the candidates. With incentives, the admissions office has a larger pool to select from, but can not tell the difference between a highly qualified physicist with a 1400 SAT and a student who had intensive tutoring and is incapable of grasping higher level physics who also has a SAT of 1400.

[Alvin]

I agree with Judge Posner. A lot of important jobs do not require a college degree. The people who repair our roads, fix our cars, build our homes, clean our yards...these jobs don't require a college degree and we need people to do them.

[robert]

I would be willing to concede the generally higher wage earnings of those who attend college versus those who don't. But I would question the automatic assumptions that all must go to college, and that one cannot succeed (insert your own definition of that word here) without a cerificate, diploma or degree of some sort. It is precisely these assumptions that have contributed to the skrocketing price of college tuition.

[Garth]

"This is because the incentives are not perfect and result in non-optimal attendees joining the program. It is not a question of unqualified attendees, but that the incentives appeal to both the qualified and unqualified. "

i totally agree with that statement. Although I think the more wishy washy social benefits of a wide variety of students that go to college for a variety of reasons are often ignored, it's true that incentives don't distinguish between someone who wants to go to learn or 'grow up' versus someone who wants to go to binge drink. I can't think of a good way to distinguish the two. In some sense that is why scholarships that require essays are good - it at least acts as kind of interview before funds are provided.

[robert]

(Meant that to read "skyrocketing".)

[Fred]

"This is an important point; if all colleges did was separate the smart from the less smart, college would be an inefficient alternative to simple testing."

The US Supreme Court decided in Griggs v. Duke Power Co. (401 U.S. 424,1971) that employers can not use intelligence testing, aptitude testing, or any other kind of testing in the selection and promotion of employees. Therefore the greater use of college as a selection criteria.

[KipEsquire]

"Because those institutions are supported by taxpayers..."

That is an important and often overlooked point. Just because there are (or may be) positive returns to higher education does not mean that there are positive externalities as well, as there likely are at the elementary and secondary level.

Indeed, the exact opposite seems reasonable: If the expected returns to a college education are so high, then there is little logic in not expecting the student, rather than the taxpayer, to shoulder the cost of that education.

Taxpayer subsidization of education (and especially student loans) becomes even more preposterous, meanwhile, at the graduate and professional level.

[Damir]

One important issue that Posner completely ignores by assuming that kids make "entirely rational decisions" about whether to go to college or not is information. His argument would be valid if all kids had perfect information about costs and benefits of high education. But this can not be assumed even as a rough approximation. Kids raised by educated parents usually have few doubts about benefits of college education, and, having heard about their parents' college experience, the costs do not appear high. On the other hand, to kids that grow up without much contact with college-educated people benefits might appear too distant and abstract, while costs might appear much higher than they actually are. This situation is clearly inefficient, because some of the kids from educated families that decide to go to college will make less efficient students (by IQ, benefits from socializing, etc.) than some of the kids from uneducated families that decide not to go to college. Correcting market inefficiencies and creating level playing field is well worth doing, for both economic and non-economic reasons.

[frankcross]

I suspect that Judge Posner may underestimate the societal benefits of matching/screening. A company could incur quite a lot of costs in this process, costs that are saved by the evidence provided by college education. Moreover, the corporate matching/screening process may be company-specific and not provide such general information in the event of job switching. And these effects may show up in other areas as well, e.g., the dating/marriage market.

[anaxanagorenas]

Dear Judge Posner,
I think about it as a signaling game.

Do you find it ironic that higher education (which is supposedly aimed at improving your cognitive skills) just ends up being a signaling game for your non-cognitive skills (ie, this person can go through the motions, finish a project etc).

If this is the case (which my undergraduate experience supports) then we should not be encouraging people to go to college. There has to be a more efficient way for people to show that they have non-cognitive skills.

regards,

anaxanagorenas

[Myles]

1. There are many different types of I.Q.'s and colleges are not generally helpful to each type. Some higher I.Q.'s could benefit much more if engaged in productive work outside of the college bubble.

2. College is often worth more money that is reasonable because the alternative, no college, can be so costly or frightening. Rather than how to reduce the cost of college, ask how to reduce the cost of joining the military, or hanging on the corner, or not maturing, or being totally absorbed by desires to acquire things, watch commercial t.v., play games, and think only of one's pleasure, or not accept or tolerate diversity among peoples. Those things go on within a college environment and outside of one, but are much more costly than college, though one may not be aware of it.

3. College education which humbles one's arrogance, solidifies one's confidence, stimulates one's desire to change and learn constantly, encourages one to bear the weight of truth, opens one to the wisdom of others, present, past and future, might be necessary and worth any price if such guidance is generally not available elsewhere in our media dominated culture.

4. The rate of return from a college education or from time invested in work could be measured in dollars in the bank at regular intervals over the next fifty years of one's life, or it could also be measured over how courageous, honest, humble, confident, imaginative, loving, etc. the person became over those same fifty years, unless of course the value of the person is measured in terms of the dollars the person has in the bank.

[Bill]

Interesting post with many good points. I would agree with the commentator who pointed out that it takes time to train someone in science or engineering, and add that it takes years in order to train someone to think critically and write well.

There is no question that we could all devise different apprentice type programs for out own fields, but one of the strengths of the American education system is that it produces students who have a solid education and the ability to learn and study in a diverse group of fields.

Similarly, trade schools and community colleges allow one to learn trades or complete course work in order to enter a graduate school in the middle or even towards the end of their working lives.

Education, and the ability to think critically, is both a public and personal good. How much of it is public and how much of it is private, and therefore hom much it should be subsidized is of course up for debate. To argue education is primarily a signaling mechanism or a way to network, I believe, does not take into account the public utility that comes from a more educated populace, and the personal utility that comes from learning how to learn. After one has completed college, it is easy to lose perspective of how much was learned over the last four years. I would encuorage all to read their first college papers just to see how far they've come.

[Doug]

Thank you for another great discussion.

Please talk a little about the costs of college. College may still be a good investment but it's getting very expensive.

Tuition rates at many universities are rising faster than general inflation, and possibly faster than the salaries of their alumni. More students are enrolling in graduate programs (see http://www.cgsnet.org/portals/0/pdf/R_GED2005.pdf, p. 23) which raises the opportunity cost of college. And higher tuition means higher finance charges (which disproportionately magnify with the amount debt because of compounding).

[jimbino]

I graduated college in 1965, when tuition was around $500 per semester at a 4-year college. I entered as a Merit Scholar with all bills paid and graduated valedictorian, but if I had to pay the exorbitant tuition rates of today and weren't fully subsidized, I'd find something better to do.

As it was, I cut all sorts of boring classes, which I was allowed to do only because I maintained a 3.8 GPA; the poor suckers with lower GPAs got limited cuts. I remember attending only one of the "compulsory" religion classes and only two of classical Greek, but that didn't keep me from gaining the highest score in both. In those days, the student had to really complete 128 semester hours to graduate; there was no "testing out" for credit. I would have been utterly miserable had it not been for extracurricular activities provided in the community and the physics, chemistry and math courses I found to fill my plate.

I expect a welcome "race to the bottom" when the brightest drop out, lowering the already abysmal standards, followed by the next brightest, etc. The only thing that keeps this trend down are the heavy subsidies for attending college. Imagine if a person could take his gummint cut and spend it on four years of travel instead!

If I had to attend university, I'd prefer the classical European model, where you get to choose your professors, attend class as you wish, and sit for exams of your choice when you feel like it. Only you should be required to pay 100% of the costs yourself.

It seems that college today is for the less-than-bright student. A truly bright person, like Gates or Dell, would be well advised to put his money in starting a business or in travel, so he could at least become proficient in a foreign language, something vital nowadays that most of our college grads, except for the foreigners, will sadly be without.

[RH]

One issue that has not been addressed at all by the discussions of either Becker or Posner is the method by which public funds are actually allocated to institutions of higher education. While higher education may or may not produce some types of public goods (I am convinced that it does), it is clear that certain types of higher education (institutional types as well as certain departments within institutions) are more likely to be producers of public goods. Thus, allocation mechanisms of public funds become key in the argument as to whether there is any economic rationale for supporting universities.

It is difficult to judge whether the U.S. and state governments are particularly good at targeting public funding to the public goods provided by higher education. However, it is worthwhile to note that for countries for which there is comparable data (using the UNESCO Institute for Statistics database), the U.S. has one of the highest ratios of private-public spending on higher education in the world. Only in Korea and Japan do private expenditures make up a higher percentage of the total expenditures on higher education. This suggests the possibility that private funds may be targeted toward educational goods with high private returns and public funds may be targeted toward educational goods with high public returns. Considerable empirical data would be required to discover whether this is, in fact, the case.

[Bruce G Charlton]

The proper question is not whether people *need* a college education to do semi-skilled jobs, but whether they would do the job *better* with a college degree.

[Jack]

Test

[Jack]

There are a few very important jobs requiring a well-rounded education (not sure that's what colleges/vocational schools are offering today!)

One is that of being a competent citizen as required by an increasingly complex democracy and world-wide economy. Obviously with what we're electing and the sheep-like lack of investigative journalism, we've lots of room for improvement. The other is that of parenting. Both seem worth some level of subsidy/investment in our future.

Cheers, and hopes! Jack

[walter]

I would like to add one thought for consideration. As Posner stated, the actual number of deaths in Iraq is quite a bit lower than Vietnam.

However, the (serious) injury rate is far higher; this will strike us in the future; a counterpoint to the learning of delayed gratification if you will.

This delay in deaths from injury will be unfolding for many decades. I postulate that any attempt in the future to engage in war will be met with very large protests because the costs will be very apparent, but showing benefit will be very difficult.

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