the value of higher education

August 24th, 2016

An increasing number of students are pursuing university degrees. There is a well-known correlation between higher education and earnings, so higher education seems to have value for those who receive it. But is higher education valuable in itself, for what students learn? Or is it merely a screening device?

Tim Harford, the FT’s ‘undercover economist’, has written a column on this subject for today’s newspaper.

A … sceptical view comes from Bryan Caplan, an economics professor who … points out — not unreasonably — that many students seem to learn nothing of any obvious relevance to the workplace but, on graduation, they’re rewarded with much better career prospects than non-graduates. Why?

Caplan’s answer is that education is a signal. If employers have no way to tell who is smart and diligent, a student can prove that she fits into that category by excelling in, say, Latin. The Latin is like a peacock’s tail: costly and useless in its own right but a necessary investment.

To the extent that Caplan is right, undergraduate degrees have no value to society: they enable employers to pay higher wages to smarter workers, but lower wages to everyone else — and in order to enjoy these higher wages, smart people must waste time and money going to the trouble of acquiring a degree. Everyone might be better off if the whole business was abandoned.

Who is right? My heart is with [LSE researchers Anna] Valero and [John] Van Reenen[, who find that universities boost the income of their regional economies]. But Caplan strikes an important note of discord.

Tim Harford, “Are universities worth it?“, Financial Times, 24 August 2016 (metered paywall).

George Mason University economist Bryan Caplan (born 1971) is in drafting The Case Against Education (Princeton University Press, expected in 2017).

Harford’s column has generated many long and thoughtful comments from readers (85 so far). Here are two ‘editor’s picks’. More comments can be accessed at the link above.

My impression is that Europe and the UK benefits from a more consistent level of quality in their universities… Oxford may be more prestigious than some of the “red brick” schools but I get the impression that a student will get a good education at any of them. In the US, the Harvards and Stanfords are world class but there are many schools that are, essentially, defrauding their students in varying degrees… All the way down to the abysmal low of Trump University. (Sorry, couldn’t resist 🙂 [Continues for two more paragraphs.]

My qualifications, BSc(Eng), PhD in engineering and an MBA, couldn’t be much more practical. However I have come to realise that a great, and rare skill, is the ability to take a subject, learn about it, understand it and to make sensible proposals on what to do about it.  You can learn that skill by studying just about anything from medieval Italian poetry to quantum physics and for non-vocational subjects. That is the real value of a degree.

the case against mandatory contributions to pension schemes

August 23rd, 2016

Two years ago I prepared, for the record, an annotated version of my June 2000 paper “Three Pillars of Pensions? A Proposal to End Mandatory Contributions”.  This paper in 2000 marked an important moment in my life, the beginning of an obsession with reform of old age pensions.

The annotated version of the paper has been accessible only at To make this version widely available, in a permanent fashion, I uploaded it today to the Munich Personal RePEc Archive (MPRA). It can now be accessed at the following link:

This short paper defined my future work on pension reform. In April of the year 2000, I was at an OECD conference in Prague, listening to presentations of two World Bank economists (Estelle James and Dimitri Vittas). At that moment, it suddenly dawned on me that an ideal pension system should provide basic pensions for everyone, funded pay-as-you-go from general government revenue, allowing citizens who desire more than basic income in retirement to save in any way they please, without subsidies, tax breaks or coercion from government. This was my ‘Eureka’ moment.

When it was my turn to speak, the very next day, I spoke with excitement and enthusiasm. The conference was on private pensions, so the audience did not react warmly to my talk. Nonetheless, I presented my core ideas orally, and drafted a discussion paper immediately after the conference.

The OECD published a version of my paper “edited for length” in 2001 on pp. 385-397 of its “Private Pensions Conference 2000” proceedings. The editors changed the subtitle from “A proposal to end mandatory contributions” to a blander “Is there a need for mandatory contributions?” In my opinion, the OECD editors removed essential points from the paper. For the record, I have highlighted all their deletions in yellow, so readers can judge for themselves how much of importance was omitted.

Have a look at the deletions the OECD editors made. Decide for yourself whether these were fair, helpful or necessary.

private pensions in Chile and Peru

August 22nd, 2016

It looks like the beginning of the end for Chile’s system of private pensions based on forced retirement savings. The Chilean model has been promoted by the World Bank in an effort to move contributory pensions away from public, pay-as-you-go schemes to privately-managed, pre-funded schemes.

Developing countries around the world have implemented versions of the Chilean model, but there are increasing complaints of high administrative charges and poor returns for participants. The model seems to have lost its appeal even in the World Bank, which now places more emphasis on non-contributory pensions, referred to as a ‘zero pillar’.

Hundreds of thousands of people across Chile have taken part in protests against the country’s controversial privatised pension plan. The scheme was launched in 1981, during the military government of General Augusto Pinochet. ….

President Bachelet, who is left wing, … proposed an increase in employer’s contributions and a reduction in commissions paid to the fund managers. But protesters want the Pension Fund Administrators (or AFP) scheme to be scrapped altogether.

Leaders of the No More AFP movement have called a nationwide strike on 4 November.

Chileans protest against Pinochet-era private pension scheme“, BBC News, 22 August 2016.

Peru is one of the many countries that would like to reform the Chilean model of pensions that they implemented long ago. By coincidence, I received today in my inbox a Declaration of The International Federation of Pension Fund Administrators (FIAP), offering technical assistance to the Government of Peru in improving its system.

FIAP is based in Santiago, Chile. Its members are companies that administer the forced retirement savings deposited with them. Members are from numerous countries of Latin America, in addition to Spain, Kazakhstan and Ukraine.

The Declaration is brief and very self-serving.  For convenience, I am copying and pasting the substantive parts below, with a link to the full document. Note the absence of any mention administrative fees, and the desire to retain all savings under control of fund managers both before and after retirement.

[FIAP] is aware that the individually funded pension system in Peru has room for improvement, but the improvements must be made on the basis of a broad technical discussion, with experts discussing the best proposals for the comprehensive reform of the pension system, which in this case would include the Pension Fund Managers (AFPs) ….

The reforms that are implemented must ensure that t he pension system has ample coverage, grants sufficient pensions, is equitable and financially sustainable, avoiding reckless actions with populist goals and the approval of policies that are detrimental to the workers themselves (for example, the recently approved rule that allows the withdrawal of 95.5% of the funds at retirement age). ….

The purpose of social security systems is to compel workers to renounce present consumption, so that when they are no longer able to work, they will have sufficient resources for financing their retirement. It is contradictory that after being forced to save throughout their working lives, workers are allowed to withdraw all their resources, leaving them devoid of all their old-age savings. FIAP therefore offers to put its technical expertise at the disposal of the competent agencies in the upcoming debate of the Commission for the Reform of the Peruvian Pension System, which will be created by the Government of the new President, Mr. Pedro Pablo Kuczynski, to fulfill the need to grant a worthy pension to all Peruvian workers. FIAP is an international agency comprising the Associations of Pension Fund Managers of the European and Latin American countries that have incorporated individually funded savings regimes into their pension systems.

FIAP Declaration No. 4, 22 August 2016.

New York, Miami and the Mariel exodus

August 21st, 2016

Iván Acosta (born 1943) left Cuba in 1961 and settled in New York, where he now works as a playwright, filmmaker and publicist.

Below are excerpts from statements Acosta made when interviewed on the subject of Amigos (1985), the first full-length film he completed as director and screenwriter. The film conveys the experience of Ramón, a fictional refugee who arrives in Miami by sea with the Mariel exodus.

I happened to be in Miami when the Mariel exodus started. Early May 1980. ….

Speaking with my friend Marcelino Miyares, who was the C.E.O. of WBBS Channel 60 in Chicago, I told him it would be great to film a documentary about the Mariel experience; Marcelino asked me, why not a movie instead? …. We created a company, … and [began] filming in July. It took us 8 weeks to film Amigos. We filmed 80% of the film in Miami; the rest was shot in South Carolina, Washington DC, Union City, New Jersey, and New York City. ….

The Cuban community in Miami had a very negative attitude towards the new refugees. So, to me, it was very important to tell the human story of the Marielitos. …. I wrote the script as a bittersweet comedy drama. …. Of course, the Cuban ultra conservatives or extreme right of Miami … didn’t like some of the things said and denounced in Amigos. ….

We all know Cuban machismo; I have seen it and experienced it all my life. You see, the revolution was the greatest promoter of machismo. All those bearded, sweaty, cigar smokers and trigger- happy militiamen impregnated the macho image—an image the maximum leader always projected and demanded among revolutionary militants. Hundreds of homosexuals were sent to prisons and to hard-labor concentrations camps, las UMAP, just for not being macho enough for revolutionary standards. Cubans, pro and anti Castro, somehow tried to imitate the Máximo Líder. I have always disliked the extreme machismo, not only among Cubans, but among all men …. We do know machismo exists, and in many societies it is celebrated and even rewarded. That was what happened in Cuba after 1959. The men wanted to be more manly than ever before, and that influence came with the exiles. I tried to ridicule the absurd machista behavior throughout different scenes in the movie. ….

To me, machistas, racists, and homophobics go hand in hand. Unfortunately, that mentality exists among some Cubans, in exile and in the archipelago. ….

I love Miami. I have never lived in Miami, although I visit it at least once a year. ….
You see, I’ve lived all my 50 plus years in exile in New York City. They always say Cubans in New York think different than Cubans in Miami, even than Cubans across the Hudson River in New Jersey. It is true, Cuban New Yorkers think and have a different perspective of the Cuban situation in general. We always hear about “Cuban Success,” which is real for some, but we never hear about a majority of hard-working Cuban exiles: in factories, restaurants, mechanical shops, construction, farms, etc. Those represent the real Cuban exiles, the working men and women who, in several cases, risked their lives to escape from Cuba to live and work in freedom. But some people consider successful those who accumulated several millions of dollars and have a luxurious yacht, a big mansion with 5 or 6 expensive automobiles. In Amigos, I tried to show that balance without criticism, the gap between the Cubans who have a lot and the unsung heroes who built the Cuban Miami and don’t have as much.

AMIGOS and Miami Post-Mariel“, Carolina Caballero talks to director IVAN ACOSTA, Cuba Counterpoints, 1 August 2016.

Carolina Caballero was born in the United States to Cuban parents. She lectures in the Department of Spanish and Portuguese, at Tulane University in New Orleans. The questions she asks Mr Acosta, more of his answers, and stills from the film Amigos, can be downloaded at the link above.

US spending on health care

August 21st, 2016

Despite Obamacare, the United States continues to spend vastly more on health care than any other country in the world, with generally worse outcomes.

Part of the reason for this waste is the burden of administration costs that come with private insurance plans. Obamacare retains private insurance for those not eligible for public insurance (Medicare – limited to the elderly and disabled), and it is supposed to be mandatory. Not all states comply with the mandatory requirement, so healthy young people tend to purchase insurance only after they become seriously ill. Insurance companies are not allowed to charge higher premiums for those with pre-existing health conditions. Premiums increase, of course, when the healthy opt out of insurance.

There are other reasons, as well, for the high cost of US health care. Timothy Taylor, the ‘Conversable Economist’, discussed all this more than four years ago in a post that, sadly, is still relevant today.

A single-payer system – such as Medicare for the elderly and disabled – would lower the cost of health care, but only one presidential candidate (Donald Trump) has come out in favour of this reform. Medicare is very popular in the United States, so I cannot understand why it is politically difficult to lower the age of universal coverage from 65 years to zero.

Here is the concluding paragraph of Timothy Taylor’s post from May, 2012. Click on the link to access the full post, which contains links to more information.

The question of why the U.S. spends more than 50% more per person on health care than the next highest countries (Switzerland and Netherlands), and more than double per person what many other countries spend, may never have a simple answer. Still, the main ingredients of an answer are becoming more clear. The U.S. spends vastly more on hospitalization and acute care, with a substantial share of that going to high-tech procedures like surgery and imaging. The U.S. does a poor job of managing chronic conditions, which then lead to episodes of costly hospitalization. The U.S. also seems to spend vastly more on administration and paperwork, with much of that related to credentialing, documenting, and billing–which is again a particular important issue in hospitals. Any honest effort to come to grips with high and rising U.S. health care costs will have to tackle these factors head-on.

Timothy Taylor, “Why Does the U.S. Spend More on Health Care than Other Countries?“. Conversable Economist, 14 May 2012.

term limits for US presidents

August 18th, 2016

George Washington, the first president of the US, limited himself to two four-year terms. This precedent was followed by all presidents until Franklin Roosevelt successfully ran for four successive terms of office. In 1947, the opposition party (frustrated Republicans) passed the 22nd Amendment to the Constitution, limiting a president to two terms of office.

Term limits constrain voter choice, so are not democratic, which is probably why they have never been imposed on members of Congress.

Canadian journalist John Ibbitson writes that, without the 22nd Amendment, Barack Obama would very likely win a third term in office. “Instead, two of the least-liked candidates in modern American history are vying to lead a foul-tempered republic.”

Mr. Obama [with 52% voter approval] is one of the most popular presidents of modern times. …. He is about as popular as Ronald Reagan was in the final August of his presidency. ….

Mr. Obama doesn’t enjoy the sky-high approval that Bill Clinton (60 per cent) or Dwight Eisenhower (62 per cent) had in their final August, but he’s far ahead of where George W. Bush (31 per cent, thats to Iraq), Lyndon Johnson (35 per cent, thanks to Vietnam) or Harry Truman (about 30 percent, thanks to Korea) sat at this point. ….

Mr. Obama, at 55, is in excellent health and considerably younger than either Ms. Clinton (68) or Mr. Trump (70). ….

Still, it may be just as well Mr. Obama is not allowed to seek a third term. Geoffrey Layman, a political scientist at Indiana’s University of Notre Dame, agrees the 22nd Amendment is ostensibly undemocratic …. [But, he adds, the US president is] “… the most powerful individual in the world. To let the same person, by virtue of their vast political skills and extremely charming personality, have that much power, that is also in some ways undemocratic”. ….

A fair point. But wouldn’t it have been something to see Mr. Trump and Mr. Obama onstage in a presidential debate?

John Ibbitson, “Unpopular candidates make compelling case against two-term limit“, The Globe and Mail (BC edition), 17 August 2016, pp. 1, 10.

John Ibbitson (born 1955) is a political writer and columnist for The Globe and Mail.

capitalism and trust

August 16th, 2016

For millennia, the trust required for exchange of goods and services was based on personal relationships: family, friends, friends of friends or friends of the family. All this changed with the rise of modern capitalism. Markets (in finance, goods and services) began to operate based on trust in strangers, eliminating the need for personal relationships.

Deirdre McCloskey, in the first volume of her series on The Bourgeois Era, explains the importance of “trust in strangers” for the smooth functioning of capitalism.

Modern capitalism … was supported by, and supported in turn, a trust in *strangers* that still distinguishes prosperous from poor economies. ….

Trust and friendship, further, make possible speculative bubbles, from the tulip mania of the 1630s to the dot-com boom of the 1990s. The very fact of capitalism’s speculative instability, therefore, argues for an entirely new prevalence of belief in strangers. “Credit” is from *creditus*, “believed”. A business cycle based on pyramids of credit was impossible in the distrustful sixteenth century. The macroeconomy could in earlier times rise and fall, of course, but from harvest booms and busts, not from credit booms and busts. ….

On this theory the episodes of disorder and unemployment in capitalism from the 1630s in Holland and from 1720 in northern Europe arose from the virtues of capitalism, not from its vices, from its trustworthiness, not from its greed. To be more exact: the business cycle arose from trustworthiness breaking down suddenly in an environment of quite normal human greed for abnormal gain ….

Deirdre McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce (University of Chicago Press, 2006), pp 158-159.

With the rise of the internet, personal reputations are once again important for commercial transactions, but trust – though personalised – continues to be trust in strangers. Tim Harford, the FT’s ‘undercover economist’, has written a column on this development, which he refers to as a ‘hybrid model’.

One of the underrated achievements of the modern world has been to develop ways to extend the circle of trust by depersonalising it. Trust used to be a very personal thing: you would trust your friends or friends of friends. But when I withdrew €400 from a cash machine [while on holiday in Bavaria], it was not because the bank trusted me but because it could verify that my bank would repay the money. This is [modern capitalism] a cold corporate miracle.

Over the past few years, people have been falling in love with a hybrid model that allows a personal reputation to work even between strangers. One example is Airbnb, which lets people stay in the homes of complete strangers, a considerable exercise of trust on both sides. We successfully used it on another stop in our Bavarian holiday. Airbnb makes personal connections but uses online reviews to keep people honest: after our stay, we reviewed our host and he reviewed us. ….

Personalised trust has never been fairly distributed. When Harvard Business School researchers … conducted field experiments on Airbnb, they found that both hosts and guests were discriminating against racial minorities. Other researchers have found evidence of discrimination in places from Craigslist to carpools. New online tools are giving us the ability to treat faraway strangers as though they were neighbours — and we do, in good ways and in bad.

Tim Harford, “The meaning of trust in the age of Airbnb“, Financial Times Magazine, 10 August 2016 (metered paywall).

what is competitiveness, and does it matter?

August 15th, 2016

Some economists, and many policymakers, believe that wage cuts are needed to restore ‘competitiveness’. FT columnist Martin Sandbu writes “There are many problems with this view”, and proceeds to discuss three of them.

First, … it makes little sense to apply the concept of competitiveness to countries, which can’t go out of business, unlike companies, which can. National prosperity depends not on competitiveness but on productivity.

Second, the word competitiveness focuses our attention on tradeable sectors, as in “export competitiveness”. Non-tradeable goods and services, after all, do not compete internationally. … [D]uring the euro’s early boom years … cost increases were in non-tradeable sectors, and the deficits were racked up by import booms, not export erosion.

Third, competitiveness is often treated as measured by how low “unit labour costs” are — the total compensation paid to workers for a given quantity of production. But it is misleading to apply unit labour costs to whole economies rather than individual sectors. … [W]hat is the labour compensation involved in producing one unit of gross domestic product? It boils down to labour’s share of economic output. The theoretical abuse of applying the unit labour cost concept at the whole-economy level camouflages the capital-labour distributive conflict in the language of efficiency.

Martin Sandbu, “Free Lunch: Getting real about competitiveness“, Financial Times, 16 August 2016 (metered paywall).

Norwegian economist Martin Sandbu (born 1975) writes “Free Lunch”, an FT daily briefing on economic issues. He is author of Europe’s Orphan: The Future of the Euro and the Politics of Debt (Princeton University Press, 2015).

Sandbu draws freely from (and cites) a working paper written more than five years ago by Jesus Felipe and Utsav Kumar, two economists on the staff of the Asian Development Bank (Manila, Philippines). Here is the abstract and an ungated link to the paper.

Current discussions about the need to reduce unit labor costs (especially through a significant reduction in nominal wages) in some countries of the eurozone (in particular, Greece, Ireland, Italy, Portugal, and Spain) to exit the crisis may not be a panacea. First, historically, there is no relationship between the growth of unit labor costs and the growth of output. This is a well-established empirical result, known in the literature as Kaldor’s paradox. Second, construction of unit labor costs using aggregate data (standard practice) is potentially misleading. Unit labor costs calculated with aggregate data are not just a weighted average of the firms’ unit labor costs. Third, aggregate unit labor costs reflect the distribution of income between wages and profits. This has implications for aggregate demand that have been neglected. Of the 12 countries studied, the labor share increased in one (Greece), declined in nine, and remained constant in two. We speculate that this is the result of the nontradable sectors gaining share in the overall economy. Also, we construct a measure of competitiveness called unit capital costs as the ratio of the nominal profit rate to capital productivity. This has increased in all 12 countries. We conclude that a large reduction in nominal wages will not solve the problem that some countries of the eurozone face. If this is done, firms should also acknowledge that unit capital costs have increased significantly and thus also share the adjustment cost. Barring solutions such as an exit from the euro, the solution is to allow fiscal policy to play a larger role in the eurozone, and to make efforts to upgrade the export basket to improve competitiveness with more advanced countries. This is a long-term solution that will not be painless, but one that does not require a reduction in nominal wages. [Emphasis added.]

Jesus Felipe and Utsav Kumar, “Unit Labor Costs in the Eurozone: The Competitiveness Debate Again“,  Levy Economics Institute Working Paper No. 651, Bard College (New York), February 2011.

Hillary Clinton: hawk or dove?

August 14th, 2016

A column written by FT Washington correspondent Edward Luce, and an earlier one written by Jeremy Shapiro (European Council on Foreign Relations) and Richard Sokolsky (Carnegie Endowment for International Peace) provide much food for thought on the direction that US foreign policy might take when the occupant of the White House changes from Obama to Clinton.

Mr Luce argues, I think correctly, that Clinton’s worldview is strikingly different from that of Obama. In brief, she is much more hawkish. Read the rest of this entry »

science and anti-science

August 14th, 2016

This week’s “Lunch with the FT” features Italian physicist Carlo Rovelli (born 1956). His latest book, Seven Brief Lessons on Physics, was published in Italian in 2014 and has since been translated (according to Wikipedia) into an amazing 41 languages. The international bestseller is available in English translation as a Penguin paperback.

I announce that I would like to start by contesting a proposition in … [his recent book] with which I do not agree.

“Oh,” he says, surprised. “Are you a scientist?” No, I reply with due ceremony, I am the FT’s pop critic. Rovelli laughs ….

The passage from the book that I proceed to quote concerns his denunciation of “the incomprehension and distrust of science shown by a significant part of our contemporary culture”. On the contrary, I suggest, the cultural standing of scientists has never been higher. Fantasies of the lab-coated geek or sinister genius have been superseded by visions of heroic intellectual achievement. Resources also favour them. In 2010, UK government funding for sciences at universities was ringfenced while humanities suffered deep cuts.

“You know, I think you’re right,” he concedes, hands on the table, fiddling with his desert spoon and fork as though conducting a gentle experiment into friction. “But it’s recent, I would say. And the UK is probably the country least touched by that [suspicion of science]. A lot of culture in France and Germany is dominated by high Gregorian ideas that true knowledge is not scientific knowledge, science is sort of second class. And it’s worse in the US. I mean, come on, when many Americans don’t believe in evolution or climate change, I think there’s a problem with anti-science.” [Emphasis added.]

Ludovic Hunter-Tilney, “Lunch with the FT: Carlo Rovelli“, Financial Times, 13 August 2016 (metered paywall).

Carlo Rovelli studied theoretical physics in his native Italy, at the University of Bologna (BS/MS) and the University of Padova (PhD). He taught at the University of Pittsburgh from 1990 to 2000 and is currently based at Aix-Marseille University (France), in its Centre de Physique Théorique.

The link above, to Rovelli’s book, contains audio recordings of the author reading from extracts of each chapter.