Saturday, November 5, 2011

The Price of Admission

Greg Mankiw--the man responsible for indoctrin...I mean teaching all the malleable young minds that go to school "in Cambridge"--today argued that Paul Krugman is wrong for for attributing rising inequality to the "growing influence of oligarchs" as opposed to education:

But it may be better to think of the return to education as stochastic. Education not only increases the average income a person will earn, but it also changes the entire distribution of possible life outcomes. It does not guarantee that a person will end up in the top 1 percent, but it increases the likelihood. I have not seen any data on this, but I am willing to bet that the top 1 percent are more educated than the average American; while their education did not ensure their economic success, it played a role.

Let me give you a couple examples. I am comfortably in the top 1 percent. I believe that Paul, with his Princeton professorship, regular Times column, speaking fees, and moderately successful textbook, is there as well. I suspect (although cannot prove) that if he and I had stopped our educations after finishing high school, we would not have been anywhere near where we are in the income distribution. If that is correct, might it be better to think of education as the key rather than focusing on the growing influence of oligarchs?

I am inclined to think that education is important here in part because the large increase in the share of the top 1 percent from the 1970s to the present occurred together with the increase in the rate of return to education during this period documented by labor economists. It is possible, of course, that the the two phenomena just happened to occur simultaneously. But the timing suggests that the two trends--the increasing value of education and the rising share of the top 1 percent--may be related.

This explanation strikes me as a bit too cursory (shocking for an Ec 101 professor, I know). Yes, education probably explains a lot of this. But a better question might be why education has become more important.

Increasingly, people in control of large institutions--corporations, Congress, etc.--have exploited agency and collective action problems to extract greater and greater benefits for themselves at the expense of society. And, like any good monopolists, they've tried to erect barriers of entry to protect those rents--the price of admission to the club.

To work at an investment bank, it helps to go to a good college. To go to a good college, it helps to go to a good high school. To go to a good high school, it helps to go to a K-8 school. To go to a good K-8 school, it helps to go to a good preschool. To go to a good preschool, it helps to go to a good OB/GYN. And so on. Even as each of these institutions has tried to democratize their student body--Mankiw certainly teaches a more diverse group of students than he would have 50 years ago--the elites actively try to frustrate these processes by raising the bar for admission (see, e.g., unpaid internships, SAT prep course, summer vacations spent teaching poor Eskimos how to play cello).

Essentially, then, education has become a more palatable way for the elites to practice their exclusionary policies than the old days, when they used people's last names and religion. They wrap this in the guise of "meritocracy"--even though it's certainly a lot easier to demonstrate your "merit" when your parents are rich. Sure, it's fine if some commoners benefit along the way by being good test-takers--as long as it doesn't come at the expense of the elite's own kids. All the better for them, really, because the presence of some non-elites serves as proof it's a "meritocracy" (or, less cynically, convinces the elites that the system really is fair).

Plus, as the rich compete for a limited number elite educational opportunities for their kids, it pushes the cost of tuition up. For those that can't afford it, that means loans. Stuck with debt, students are forced to take high-paying jobs working for the elite (buying out the potential competition), who can now convince them they truly deserve the six figure salary they're receiving. After all, they "earned" it, just like the elites themselves.

So Mankiw is probably right to point out the correlation between the rise of education and the rise of inequality. But I think he has causation wrong. Education hasn't become more important because it's become intrinsically more valuable, but because the oligarchs have made it so.


Jack said...

And just as a more concrete example of why the return on education might have increased:

In the old days, a Harvard Law degree would be necessary, but not sufficient to join a Wall Street firm (Jewish students. even the brilliant ones, were discriminated against, for instance). By moving the focus toward education and away from prejudice, it has two effects:

1.) The returns for all people with educations jump, because you need to prove you're no longer discriminating. A Harvard Law degree becomes sufficient, not just necessary, for getting a high-paying job.

2.) The returns for all people with educations jump, because you've made education a more legitimate signaling device. By convincing the public it's meritocratic-whether true or not-you've increased the value of the degree. As the old saying goes, no one ever got fired for hiring IBM (or, in this case, a Harvard Law grad). Why else would law firms put all their lawyers' fancy degrees on their websites?

Jack said...

P.P.S. Also, because I might not have made this sufficiently clear, by creating the illusion of a meritocracy, it let's the oligarchs justify grabbing an ever-increasing share of the pie, because they "earned" it, of course.