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Yes, We Still Make Stuff, and It Wouldn’t Matter if We Didn’t – Article by Steven Horwitz

Yes, We Still Make Stuff, and It Wouldn’t Matter if We Didn’t – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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One of the perennial complaints about the US economy is that we don’t “make stuff” anymore. You hear this from candidates from both major parties, but especially from Donald Trump and Bernie Sanders. The argument seems to be that our manufacturing sector has collapsed and that all US workers do is to provide services, rather than manufacturing tangible goods.

It turns out that this perception is wrong, as the US manufacturing sector continues to grow and in 2014 manufacturing output was higher than at any point in US history. But even if the perception were correct, it does not matter. The measure of an economy’s health isn’t the quantity of physical stuff it produces, but rather the value that it produces. And value comes in a variety of forms.

Manufacturing is Up

The path to economic growth is not to freeze into place the US economy of the 1950s. Let’s deal with the myth of manufacturing decline first. The one piece of evidence in favor of that perception is that there are fewer manufacturing jobs today than in the past. Total manufacturing employment peaked at around 19 million jobs in the late 1970s. Today, there are about 12.5 million manufacturing jobs in the US.

However, manufacturing output has never been higher. The real value of US manufacturing output in 2014 was over $2 trillion. The real story of the US manufacturing sector is that we have become so much more efficient, that we can produce more and more manufactured goods with less and less labor. These efficiency gains are largely the result of computer technology and automation, especially in the last fifteen years.

The labor that we no longer need in order to produce an ever-increasing amount of stuff is now available to produce a whole variety of other things we value, from phone apps to entertainment to the expanded number and variety of grocery stores and restaurants, to the data analyses that makes all of this growth possible.

Just as the workers in those factories we are so nostalgic for were labor freed from growing food thanks to the growth in agricultural productivity, so are today’s web designers, chefs at the newest hipster café, and digital editors in Hollywood the labor that has been freed from producing “stuff” thanks to greater technological productivity.

Or, put differently: those agricultural, industrial, and computer revolutions collectively have enabled us to have more food, more stuff, and more entertainment, apps, services, and cage-free chicken salads served with kale. The list of human wants is endless, and the less labor we use to satisfy some of them, the more we have to start working on other ones.

But notice something: all of the things that we produce have something in common. Whether it’s food or footwear, or automobiles or apps, or manicures or massages, the point of production is to rearrange capital and labor in ways that better satisfy wants. In the language of economics, the point of production (and exchange) is to increase utility.

When we produce more cars that people wish to buy, it increases utility. When we open a new Asian fusion street food taco stand, it increases utility. When Uber more effectively uses the existing stock of cars, it increases utility. When we exchange dollars for manicures, it increases utility.

Adam Smith helped us to understand that the wealth of nations is not measured by how much gold a country possesses. Modern economics helps us understand that such wealth is not measured by how much physical stuff we manufacture. Increases in wealth happen because we arrange the physical world in ways that people value more.

Neither producing cars nor providing manicures changes the number of atoms in the universe. Both activities just rearrange existing matter in ways that people value more. That is what economic growth is about.

Misplaced Nostalgia

We’re richer because we have allowed markets to produce with fewer workers. When we are fooled into believing that “growth” is synonymous with “stuff,” we are likely to make two serious errors. First, we ignore the fact that the production of services is value-creating and therefore adds to wealth.

Second, we can easily believe that we need to “protect” manufacturing jobs. We don’t. And if we try to do so, we will not only stifle economic growth and thereby impoverish the citizenry, we will be engaging in precisely the sort of special-interest politics that those who buy the myth of manufacturing often rightly complain about in other sectors.

The path to economic growth is not to freeze into place the US economy of the 1950s. We are far richer today than we were back then, and that’s due to the remaining dynamism of an economy that can still shed jobs it no longer needs and create new ones to meet the ever-changing wants of the consumer.

The US still makes plenty of stuff, but we’re richer precisely because we have allowed markets to do so with fewer workers, freeing those people to provide us a whole cornucopia of new things to improve our lives in endless ways. We can only hope that the forces of misplaced nostalgia do not win out over the forces of progress.

Steven_Horwitz

Steven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions.

He is a member of the FEE Faculty Network.

This article was originally published on FEE.org. Read the original article.

Demagoguery vs. Data on Employment in America – Article by Tyler Watts

Demagoguery vs. Data on Employment in America – Article by Tyler Watts

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The New Renaissance Hat
Tyler Watts
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Demagogue politicians love to play on popular fears that low-wage foreigners are “stealing” good-paying American jobs by way of outsourcing and globalization. The claim is made by nativists and protectionists of all political stripes, whether leftists complaining of a “rigged economy” or rightists speaking of other countries “beating us” economically.

A sound economic analysis of the claim about job losses due to international trade should address two questions: First, is it true that the US has lost jobs due to trade (or other factors)? Second, is this phenomenon good or bad overall for the US and world economies?

On the first point, it can appear as though the US has lost jobs. For example, as Figure 1 shows, manufacturing employment in the US has declined by about 2 million from pre-Great Recession levels, and is down by over 7 million, or 37 percent, from the all-time high reached in 1979.

Figure 1: Total Manufacturing Employment, 1940–2016

watts1

The problem, though, is that by looking at manufacturing in terms of jobs, we’re missing the full picture of industrial production.

Nevertheless, the demagogues still argue that, even though high-paying service sector jobs have more than replaced lost factory jobs, “we don’t make things here anymore” and we should lament this. This oft-heard refrain is patently false. We don’t make certain things, such as garments, toys or electronics, because global free trade and technological advances tend to shift America’s output into those industries in which our comparative advantage is greatest. But Americans do indeed make things — quite valuable things.

This can be seen in Figure 2, which shows the US Industrial Production Index for the “de-industrialization” period. After the expected steep decline following the Great Recession of 2008–2009, US manufacturing has slowly bounced back and is now producing more products, in value-added terms, than ever before. Indeed, this index, which consists mainly of manufacturing, has grown by over 100 percent since the 1979 peak in manufacturing employment.

Figure 2: Industrial Production Index for the United States, 1979–2016

watts2

In other words, thanks to productivity gains, we need fewer workers to make more stuff.

From an economic perspective, nothing could be better news. US manufacturing creates 100 percent more value with 37 percent fewer workers. Creating more value with fewer workers means we’re more efficient than ever, or put another way, more productive than ever. These awesome productivity gains have many sources, especially in the form of technological advances in areas like software, robotics, and communications. Globalization and outsourcing have also played a role, as they allow American workers a greater degree of specialization in those sectors where our productivity edge is largest.

The good news gets better, though: not only have we gained jobs on net, but jobs have grown faster than the population over time. Since the 1979 peak in manufacturing employment, the US adult population grew by 53 percent, whereas employment grew by 59 percent, as shown in Figure 3.

Figure 3: Population Growth vs. Employment Growth Since 1979

watts3Source: Federal Reserve Economic Data

Despite these generally positive facts, some still contend that we’ve replaced “good” manufacturing jobs with lousy service sector jobs. Well, of course it must be true that, if we’ve lost manufacturing jobs, but gained jobs overall, then all of the job gains must have come from non-manufacturing sectors. And indeed the service sector, broadly defined, has seen employment growth of 90 percent since our 1979 benchmark. But beware of making hasty earnings assumptions about a sector that employs nearly 124 million people. To see whether the newly-created “service sector” jobs really don’t pay as well as the vaunted manufacturing jobs, we need to drill down into the employment and earnings data. What we’ll find is that a large majority of the new service sector jobs pay just as well or much better than manufacturing jobs.

Table 1 presents Bureau of Labor Statistics data on the 15 largest sectors and sub-sectors of the US economy, which together represent over 96 percent of the total net increase in payroll employment for the post-peak manufacturing jobs era (1979 to 2016). This might come as a surprise to the anti-globalization crowd: despite the loss of 7 million manufacturing jobs (and some mining, logging, and utilities sector jobs), we’ve seen a net increase of nearly 53 million total jobs. Of these net new jobs, fully 62 percent of them feature, as of January 2016, average hourly earnings equal to or greater than current average hourly manufacturing earnings. In other words, most of the 53 million new jobs pay the same or better wages than the demagogues’ benchmark “good” manufacturing jobs. So we lost 7 million good jobs, only to gain about 32 million equal or better-paying jobs, along with about 19 million lower-paying jobs (about 38 percent of net new jobs pay less than manufacturing).

Table 1: Employment Changes and Current Earnings by Sector

watts4Source: Bureau of Labor Statistics

We’ve established that, despite a major decrease in employment in the manufacturing sector, we’ve gained many more jobs than we’ve lost in the past 35 years or so, and that most of these new jobs pay better to boot. Economic changes, while painful in the short run, have brought gains in output and employment not only for the US, but for the rest of the world as well. Overall, this is good news for the US and world economies.

So, as the campaign season heats up, let’s not be misled by baseless arguments about America “losing jobs” or other countries “beating us” at trade. Trade is a positive sum game, and the benefits for both the US and world economies are, shall we say, “yuge.”

Tyler Watts earned his PhD in economics at George Mason University in 2010. He currently teaches economics at East Texas Baptist University and runs the Institute for Economic Education (see YouTube channel here), a public outreach focused on integrating economics with a Biblical worldview and providing unique teaching tools for high school and college economics students.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Bernie Sanders’ Anti-Foreign Crankery – Article by Daniel Bier

Bernie Sanders’ Anti-Foreign Crankery – Article by Daniel Bier

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The New Renaissance HatDaniel Bier
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A Vesuvius of Tribalism and Economic Illiteracy

At Sunday’s Democratic presidential debate, Bernie Sanders attacked American trade with Mexicans, Chinese, Vietnamese, and presumably all other foreigners who might try to steal our jobs. Sanders harangued Hillary Clinton,

NAFTA, supported by the Secretary, cost us 800,000 jobs nationwide, tens of thousands of jobs in the Midwest. Permanent normal trade relations with China cost us millions of jobs.

Look, I was on a picket line in early 1990’s against NAFTA because you didn’t need a PhD in economics to understand that American workers should not be forced to compete against people in Mexico making 25 cents an hour.

… And the reason that I was one of the first, not one of the last to be in opposition to the TPP is that American workers … should not be forced to compete against people in Vietnam today making a minimum wage of $0.65 an hour.

Look, what we have got to do is tell corporate America that they cannot continue to shut down. We’ve lost 60,000 factories since 2001. They’re going to start having to, if I’m president, invest in this country — not in China, not in Mexico.

First, let’s note his dodgy job numbers. As Dan Griswold noted in 2011, in response to a similar claim about jobs “lost” from the “trade deficit” with Mexico,

In the first five years after NAFTA’s passage, 1994-98, when we could have expected it to have the most impact, the U.S. economy ADDED a net 15 million new jobs, including 700,000 manufacturing jobs.

Behold, the horror unleashed on US manufacturing jobs by trade with Mexico:nafta-manufacturing

In fact, since NAFTA went into effect in 1994, total US employment has increased by 28 million jobs. Even if we buy the dubious claim that NAFTA “cost us 800,000 jobs” over the last 22 years, this amounts just 36,000 jobs a year.

As Griswold noted, even in good times, 300,000 Americans file for unemployment each week. The US economy creates and destroys more than 15 million jobs every year. This alleged displacement amounts to less than one day’s worth of job losses.

It’s true that, in the long-run, manufacturing jobs have been in decline in the United States. But this is not because manufacturing is in decline. The myth (promoted by the other nationalist blowhard in the race) that United States “doesn’t make stuff anymore” is not just wrong — it couldn’t be further from the truth.

Real US manufacturing output is the highest it has ever been. Simply put, the US makes more stuff than ever.

manufacturing-indexHow can this be? Because manufacturing productivity — the amount of value added per hour worked — has gone up dramatically in recent decades. Manufacturing employment is declining because of automation; a US factory worker today can add a lot more value per hour than one in 1970.

manufacturing-employees-output-per-hour

It’s simply not true that trade devastated the US economy and wiped out millions of jobs. Employment has shifted within the US economy, out of industry into service jobs, and manufacturing has shifted around the globe, aligning production with the comparative advantages of each country’s labor and capital markets.

The resentment stoked by nationalists like Trump and Sanders is based on a nonsensical proposition, a mirage of high-paying blue collar jobs stolen by conniving foreigners, which we could reclaim if only we had the will to wage a trade war.

But the machines and global production chains are here to stay, and the jobs being done in Vietnam and China for fifty cents an hour are on the extreme low end of the value-added chain — which should be obvious, when you think about it, since they pay so little. (On the back of every iPhone is a short economics lesson on this point: “Designed by Apple in California. Assembled in China.”)

Do we really want to “bring those jobs back”? Do we envision a future where the American middle class is sewing textiles in sweatshops for a dollar an hour? Of course not. Americans today likely wouldn’t do those jobs at any wage, but especially not at the wages paid to low-skilled workers in developing Asian and Latin American countries. Those jobs only exist at those wages; at higher wages, they are scarcer, higher-skilled, and more capital intensive.

True, we could make t-shirts and Happy Meal toys in the United States, but we’d be doing it with far, far fewer workers and a lot more capital. Instead of 30 workers at fifty cents an hour, it’d be one person with a machine for $20 an hour.

The real difference would be that everyone would be poorer as a result: consumers paying higher prices, foreigners working in worse conditions and for less money, and American resources being diverted away from where they are most productive.

This is where economic ignorance stops being morally neutral and becomes a real threat to the life and well-being of the poor, especially in the developing world.

Not content to merely keep Mexicans from working in the United States (where, thanks to US capital and infrastructure, they could earn three or four times more than they make in Mexico), Bernie Sanders now objects to the right of Mexicans to work in Mexico, if they dare to sell goods and services to Americans — or, God forbid, try to compete with American firms.

For a champion of the poor like Sanders, there’s a double irony here, in that poor Americans are already much wealthier than poor Mexicans, and that tariffs also make goods more expensive for native consumers, disproportionately hurting the poorest Americans. Not only are poor Mexicans made worse off, by losing access to the US market and thus losing jobs, but poor Americans are also made worse off by having less disposable income, which is thus not spent elsewhere in the economy to sustain other American jobs.

And this is just the first order effects of closing off trade with Mexico. When the Mexican government inevitably retaliates, US exports to Mexico (which totaled $236 billion in 2015) will also be devastated and more jobs will be lost. And of course, simply multiply this orders of magnitude for China, Vietnam, and every other country on the nationalistic hit list.

Who gains from this? In the long run, nobody, which is why (after decades of gradual reform) we finally got relatively free trade with our closest neighbors, signed into law by a liberal Democrat. But in the short run, a few US corporations and labor unions would benefit from trade tariffs — at the expense of both poor foreigners and poor Americans as a whole.

(For those keeping score, this makes it an ironic hat trick for Sanders, whose tirades against free trade and open borders are laced with fear-mongering about “corporations.”)

Finally, let us ponder Sanders’ Alice-in-Wonderland solution to the imagined ills of free trade:

Look, what we have got to do is tell corporate America that they cannot continue to shut down. We’ve lost 60,000 factories since 2001. They’re going to start having to, if I’m president, invest in this country — not in China, not in Mexico.

Did I say Alice in Wonderland? I meant Atlas Shrugged. Ayn Rand was justly accused of having unbelievable, one-dimensional stereotypes, but sadly, American politics seems to have the same problem.

It’s anyone’s guess how Sanders imagines he could force factories not to close and order companies to stay in the United States, but the “you can’t shut down” solution is almost directly lifted from “Directive 10-289,” the order that Rand’s antagonists use to try to “stabilize” the economy:

All workers, wage earners and employees of any kind whatsoever shall henceforth be attached to their jobs and shall not leave nor be dismissed nor change employment… All industrial, commercial, manufacturing and business establishments of any nature whatsoever shall henceforth remain in operation…

Faced with economic decline, the government believed that the only option was to stop the decline, rather allowing people to go where they choose, buy what they choose, and make what they choose. “What it comes down to is that we can manage to exist as and where we are, but we can’t afford to move!” archvillain Wesley Mouch exclaims. “So we’ve got to stand still… We’ve got to make those bastards stand still!”

When Rand first published this in 1957, this was hyperbole about the fear of change, the reductio ad absurdum of the argument for keeping things as they are. Now, it’s an applause line for mainstream presidential candidates.

Daniel Bier is the site editor of FEE.org He writes on issues relating to science, civil liberties, and economic freedom.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Low-Skilled Workers Flee the Minimum Wage – Article by Corey Iacono

Low-Skilled Workers Flee the Minimum Wage – Article by Corey Iacono

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The New Renaissance HatCorey Iacono
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What happens when, in a country where workers are free to move, a region raises its minimum wage? Do those with the fewest skills seek out the regions with the highest wage floors?

New minimum wage research by economist Joan Monras of the Paris Institute of Political Studies (Sciences Po) attempts to answer that question. Monras theoretically shows that there should be a close relationship between the employment effects of raising the minimum wage and the migration of low-skilled workers.

When the demand for local low-skilled labor is relatively unresponsive (or inelastic) to wage changes, raising the minimum wage should lead to an influx of low-skilled workers from other states in search of better-paying jobs. On the other hand, if the demand for low-skilled labor is relatively responsive (or elastic), raising the minimum wage will lead low-skilled workers to flee to states where they will more easily find employment.

To test the model empirically, Monras examined data from all the changes in effective state minimum wages over the period 1985 to 2012. Looking at time frames of three years before and after each minimum wage increase, Monras found that

  1. As depicted in the graph below on the left, those who kept their jobs earned more under the minimum wage. No surprise there.
  2. As depicted in the graph below on the right, workers with the fewest skills were having an easier time finding full-time employment prior to the minimum wage increase. But this trend completely reversed as soon as the minimum wage was increased.
  3. A control group of high-skilled workers didn’t experience either of these effects. Those affected by the changing laws were the least skilled and the most vulnerable.

monrasp17a

These results show that the timing of minimum wage increases is not random.

Instead, policy makers tend to raise minimum wages when low-skilled workers’ real wages are declining and employment is rising. Many studies, misled by the assumption that the timing of minimum wage increases is not influenced by local labor demand, have interpreted the lack of falling low-skilled employment following a minimum wage increase as evidence that minimum wage increases have no effect on employment.

When Monras applied this same false assumption to his model, he got the same result. However, to observe the true effect of minimum wage increases on employment, he assumed a counterfactual scenario where, had the minimum wages not been raised, the trend in low-skilled employment growth would have continued as it was.

By making this comparison, Monras was able to estimate that wages increased considerably following a minimum wage hike, but employment also fell considerably. In fact, employment fell more than wages rose. For every 1 percent increase in wages, the share of a state’s population of low-skilled workers in full-time employment fell by 1.2 percent. (The same empirical approach showed that minimum wage increases had no effect on the wages or employment of a control group of high-skilled workers.)

Monras’s model predicts that if labor demand is sensitive to wage changes, low-skilled workers should leave states that increase their minimum wages — and that’s exactly what his empirical evidence shows.

According to Monras,

A 1 percent reduction in the share of employed low-skilled workers [following a minimum wage increase] reduces the share of low-skilled population by between .5 and .8 percent. It is worth emphasizing that this is a surprising and remarkable result: workers for whom the [minimum wage] policy was designed leave the states where the policy is implemented.

These new and important findings reinforce the view that minimum wage increases come at a cost to the employment rates of low-skilled workers.

They also pose a difficult question for minimum wage proponents: If minimum wage increases benefit low-skilled workers, why do these workers leave the states that raise their minimum wage?

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Maybe the Hardest Nut for a New Scientist to Crack: Finding a Job – Article by Bryan Gaensler

Maybe the Hardest Nut for a New Scientist to Crack: Finding a Job – Article by Bryan Gaensler

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The New Renaissance Hat
Bryan Gaensler
March 29, 2015
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The typical biography of a scientist might look something like this.

At a young age, a boy or girl discovers a love for science. Their dream is to become perhaps a geologist, a chemist, or a marine biologist.

At school they work hard at math and science, and they supplement this with everything else they can get their hands on: books, documentaries, public talks and visits to museums. They take all the right courses at college and then embark on a PhD in their chosen field.

After many years of hard effort (including chunks of time racked with doubt and frustration), they complete a solid body of work that contains some genuinely new discoveries. They’ve had the chance to meet some of the big names they read about as a kid, and now actually know some of them on a first-name basis.

The day a young graduate receives his or her science diploma is the most thrilling and satisfying day of their life. They are finally, officially, a scientist.

But there’s one thing that all those years of study and research has not prepared them for: the job market.

Scientist_Telescope
There must be a job out there somewhere…. Michael Salerno, CC BY-NC-SA

Pounding the pavement as a scientist

No matter what your profession, job hunting is not fun. But for scientists and other researchers, it’s a weird world of intense competition, painfully long time scales, and uncertain outcomes.

The strangest thing about a scientific career is that the application deadlines are often ridiculously early. Hoping to find a university position starting in September? If you wait until February or March to begin your job search, you’ve likely left it way too late. The application deadlines for some of the juiciest positions were way back in November and December.

Because of this advanced schedule, only the things that someone accomplishes a year or more before actually needing a new job will matter for their career prospects. Any amazing discoveries made after the application deadline are largely irrelevant.

The problem is that this is not always how science works.

For many important research topics, all the headline results emerge only at the very end. Students whose research is part of a massive longitudinal study or who are members of a big project team suddenly find themselves at a huge disadvantage, because they often can’t provide instant evidence of the quality of their work a whole year before needing a job.

The other daunting thing is the intensity of the competition. For most specialized scientific topics, there are far more PhD degrees than job postings: across all of science, doctoral degrees outnumber faculty positions by a ratio of 12 to one. An advertisement for a fellowship or junior faculty position will routinely draw hundreds of applications, and only 1%-2% of graduates will eventually land a coveted professorship.

How to proceed, when the odds are so stacked against you? Inevitably, the only way to counter the competition is to apply for lots of positions. A budding scientist is expected to apply for a dozen or more jobs, spread all over the world.

This situation immediately creates some challenges and problems.

By increasing the quantity of applications, the quality suffers. In an ideal world, an applicant will provide a carefully wrought narrative, weaving a story as to how their skills and background perfectly dovetail with the interest of the department they hope will hire them. But there’s no time for that. Instead one typically sends out a generic CV and research plan, and then essentially just hopes for the best.

The process is also incredibly inefficient. Professors all over write endless careful letters of recommendation, most of which have little bearing on the outcome. Selection panels spend hundreds of hours reading huge piles of applications, but can only afford a scant 10-15 minutes considering the merits of each candidate.

What’s more, not everyone can freely pursue jobs anywhere the market will take them. Young children, aging parents and other personal circumstances result in a large pool of outstanding scientists with strong geographic constraints, and hence limited options.

Overall, the harsh reality is that many applicants will simply not get any offers. A lifelong dream of being a scientist, combined with an advanced postgraduate degree, is tragically not a guarantee of a scientific career.

Good scientists should be able to find jobs

The frustration, disappointment and disillusionment grow every year. Things need to change.

First, employers need to make much more of an effort to tell applicants what sort of scientist they are looking for. Instead of reducing the job searching process to the scientific equivalent of speed dating, advertisements need to set out a clear and detailed set of selection criteria, with lots of context and background on the role and working environment. By properly telling the community what they’re looking for, labs and research institutes can focus their time on candidates with useful qualifications, and applicants can focus their energy on only those jobs for which they have a realistic chance.

Second, we need to create flexible career paths. Part-time positions, “two body” hires for couples with both members in academia, and accommodation of career interruptions need to become de rigueur, rather than whispered legends we’ve all only ever heard about second- or third-hand.

And finally, a specialist science degree needs to move beyond the expectation that it offers training only in one particular type of science.

A good scientist graduates with passion, vision and brilliance, and also with persistence, organization, rigor, eloquence and clarity. A scientist can incisively separate out truth from falsehoods, and can solve complicated problems with precious little starting information. These are highly desired attributes. The scientific community needs not just accept but celebrate that the skills and values we cherish are the paths to a wide range of stimulating and satisfying careers – both in and out of academia.

Bryan Gaensler is an award-winning astronomer and passionate science communicator, who is internationally recognised for his groundbreaking work on dying stars, interstellar magnets and cosmic explosions. A former Young Australian of the Year, NASA Hubble Fellow, Harvard professor and Australian Laureate Fellow, Gaensler is currently the Director of the Dunlap Institute for Astronomy and Astrophysics at the University of Toronto. He gave the 2001 Australia Day Address to the nation, was awarded the 2011 Pawsey Medal for outstanding research by a physicist aged under 40, and in 2013 was elected as a Fellow of the Australian Academy of Science. His best-selling popular science book Extreme Cosmos was published worldwide in 2012, and has subsequently been translated into four other languages.

This article is republished pursuant to a Creative Commons Attribution No-Derivatives license. It was originally published by The Conversation.

Ludd vs. Schumpeter: Fear of Robot Labor is Fear of the Free Market – Article by Wendy McElroy

Ludd vs. Schumpeter: Fear of Robot Labor is Fear of the Free Market – Article by Wendy McElroy

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The New Renaissance Hat
Wendy McElroy
September 18, 2014
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“Report Suggests Nearly Half of U.S. Jobs Are Vulnerable to Computerization,” screams a headline. The cry of “robots are coming to take our jobs!” is ringing across North America. But the concern reveals nothing so much as a fear—and misunderstanding—of the free market.

In the short term, robotics will cause some job dislocation; in the long term, labor patterns will simply shift. The use of robotics to increase productivity while decreasing costs works basically the same way as past technological advances, like the production line, have worked. Those advances improved the quality of life of billions of people and created new forms of employment that were unimaginable at the time.

Given that reality, the cry that should be heard is, “Beware of monopolies controlling technology through restrictive patents or other government-granted privilege.”

The robots are coming!

Actually, they are here already. Technological advance is an inherent aspect of a free market in which innovators seeks to produce more value at a lower cost. Entrepreneurs want a market edge. Computerization, industrial control systems, and robotics have become an integral part of that quest. Many manual jobs, such as factory-line assembly, have been phased out and replaced by others, such jobs related to technology, the Internet, and games. For a number of reasons, however, robots are poised to become villains of unemployment. Two reasons come to mind:

1. Robots are now highly developed and less expensive. Such traits make them an increasingly popular option. The Banque de Luxembourg News offered a snapshot:

The currently-estimated average unit cost of around $50,000 should certainly decrease further with the arrival of “low-cost” robots on the market. This is particularly the case for “Baxter,” the humanoid robot with evolving artificial intelligence from the US company Rethink Robotics, or “Universal 5” from the Danish company Universal Robots, priced at just $22,000 and $34,000 respectively.

Better, faster, and cheaper are the bases of increased productivity.

2. Robots will be interacting more directly with the general public. The fast-food industry is a good example. People may be accustomed to ATMs, but a robotic kiosk that asks, “Do you want fries with that?” will occasion widespread public comment, albeit temporarily.

Comment from displaced fast-food restaurant workers may not be so transient. NBC News recently described a strike by workers in an estimated 150 cities. The workers’ main demand was a $15 minimum wage, but they also called for better working conditions. The protesters, ironically, are speeding up their own unemployment by making themselves expensive and difficult to manage.

Labor costs

Compared to humans, robots are cheaper to employ—partly for natural reasons and partly because of government intervention.

Among the natural costs are training, safety needs, overtime, and personnel problems such as hiring, firing and on-the-job theft. Now, according to Singularity Hub, robots can also be more productive in certain roles. They  “can make a burger in 10 seconds (360/hr). Fast yes, but also superior quality. Because the restaurant is free to spend its savings on better ingredients, it can make gourmet burgers at fast food prices.”

Government-imposed costs include minimum-wage laws and mandated benefits, as well as discrimination, liability, and other employment lawsuits. The employment advisory Workforce explained, “Defending a case through discovery and a ruling on a motion for summary judgment can cost an employer between $75,000 and $125,000. If an employer loses summary judgment—which, much more often than not, is the case—the employer can expect to spend a total of $175,000 to $250,000 to take a case to a jury verdict at trial.”

At some point, human labor will make sense only to restaurants that wish to preserve the “personal touch” or to fill a niche.

The underlying message of robotechnophobia

The tech site Motherboard aptly commented, “The coming age of robot workers chiefly reflects a tension that’s been around since the first common lands were enclosed by landowners who declared them private property: that between labour and the owners of capital. The future of labour in the robot age has everything to do with capitalism.”

Ironically, Motherboard points to one critic of capitalism who defended technological advances in production: none other than Karl Marx. He called machines “fixed capital.” The defense occurs in a segment called “The Fragment on Machines”  in the unfinished but published manuscript Grundrisse der Kritik der Politischen Ökonomie (Outlines of the Critique of Political Economy).

Marx believed the “variable capital” (workers) dislocated by machines would be freed from the exploitation of their “surplus labor,” the difference between their wages and the selling price of a product, which the capitalist pockets as profit. Machines would benefit “emancipated labour” because capitalists would “employ people upon something not directly and immediately productive, e.g. in the erection of machinery.” The relationship change would revolutionize society and hasten the end of capitalism itself.

Never mind that the idea of “surplus labor” is intellectually bankrupt, technology ended up strengthening capitalism. But Marx was right about one thing: Many workers have been emancipated from soul-deadening, repetitive labor. Many who feared technology did so because they viewed society as static. The free market is the opposite. It is a dynamic, quick-response ecosystem of value. Internet pioneer Vint Cerf argues, “Historically, technology has created more jobs than it destroys and there is no reason to think otherwise in this case.”

Forbes pointed out that U.S. unemployment rates have changed little over the past 120 years (1890 to 2014) despite massive advances in workplace technology:

There have been three major spikes in unemployment, all caused by financiers, not by engineers: the railroad and bank failures of the Panic of 1893, the bank failures of the Great Depression, and finally the Great Recession of our era, also stemming from bank failures. And each time, once the bankers and policymakers got their houses in order, businesses, engineers, and entrepreneurs restored growth and employment.

The drive to make society static is powerful obstacle to that restored employment. How does society become static? A key word in the answer is “monopoly.” But we should not equivocate on two forms of monopoly.

A monopoly established by aggressive innovation and excellence will dominate only as long as it produces better or less expensive goods than others can. Monopolies created by crony capitalism are entrenched expressions of privilege that serve elite interests. Crony capitalism is the economic arrangement by which business success depends upon having a close relationship with government, including legal privileges.

Restrictive patents are a basic building block of crony capitalism because they grant a business the “right” to exclude competition. Many libertarians deny the legitimacy of any patents. The nineteenth century classical liberal Eugen von Böhm-Bawerk rejected patents on classically Austrian grounds. He called them “legally compulsive relationships of patronage which are based on a vendor’s exclusive right of sale”: in short, a government-granted privilege that violated every man’s right to compete freely. Modern critics of patents include the Austrian economist Murray Rothbard and intellectual property attorney Stephan Kinsella.

Pharmaceuticals and technology are particularly patent-hungry. The extent of the hunger can be gauged by how much money companies spend to protect their intellectual property rights. In 2011, Apple and Google reportedly spent more on patent lawsuits and purchases than on research and development. A New York Times article addressed the costs imposed on tech companies by “patent trolls”—people who do not produce or supply services based on patents they own but use them only to collect licensing fees and legal settlements. “Litigation costs in the United States related to patent assertion entities [trolls],” the article claimed, “totaled nearly $30 billion in 2011, more than four times the costs in 2005.” These costs and associated ones, like patent infringement insurance, harm a society’s productivity by creating stasis and  preventing competition.

Dean Baker, co-director of the progressive Center for Economic Policy Research, described the difference between robots produced on the marketplace and robots produced by monopoly. Private producers “won’t directly get rich” because “robots will presumably be relatively cheap to make. After all, we can have robots make them. If the owners of robots get really rich it will be because the government has given them patent monopolies so that they can collect lots of money from anyone who wants to buy or build a robot.”  The monopoly “tax” will be passed on to impoverish both consumers and employees.

Conclusion

Ultimately, we should return again to the wisdom of Joseph Schumpeter, who reminds us that technological progress, while it can change the patterns of production, tends to free up resources for new uses, making life better over the long term. In other words, the displacement of workers by robots is just creative destruction in action. Just as the car starter replaced the buggy whip, the robot might replace the burger-flipper. Perhaps the burger-flipper will migrate to a new profession, such as caring for an elderly person or cleaning homes for busy professionals. But there are always new ways to create value.

An increased use of robots will cause labor dislocation, which will be painful for many workers in the near term. But if market forces are allowed to function, the dislocation will be temporary. And if history is a guide, the replacement jobs will require skills that better express what it means to be human: communication, problem-solving, creation, and caregiving.

Wendy McElroy (wendy@wendymcelroy.com) is an author, editor of ifeminists.com, and Research Fellow at The Independent Institute (independent.org).

This article was originally published by The Foundation for Economic Education.

Commonly Misunderstood Concepts: Employment (2009) – Article by G. Stolyarov II

Commonly Misunderstood Concepts: Employment (2009) – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
Originally Published November 26, 2009
as Part of Issue CCXX of The Rational Argumentator
Republished July 24, 2014
******************************
Note from the Author: This essay was originally published as part of Issue CCXX of The Rational Argumentator on November 26, 2009, using the Yahoo! Voices publishing platform. Because of the imminent closure of Yahoo! Voices, the essay is now being made directly available on The Rational Argumentator.
~ G. Stolyarov II, July 24, 2014
****
****

The mistaken identification of wealth with money, which I refuted in an earlier installment of this series, results in yet another damaging fallacy: the idea that the only legitimate “employment” is work performed for somebody else in exchange for money. This cultural confusion has become so deep-rooted that even people who own their own businesses or function as independent contractors are classified as “self-employed” – which, despite the second component of that term, is somehow seen as distinct from being “employed,” which has become in the minds of many identical to working for a formal organization on a fixed schedule for largely fixed compensation. There is nothing wrong with the latter kind of employment; indeed, I am currently engaged in it, and it pays well. It is a practical and a tremendously useful way to earn a living for many. But the societal stigma against many individuals who choose not to pursue that path needs to end.

I am not here seeking to justify individuals who refuse to work out of sloth or rebelliousness – or individuals who choose to subsist off of the welfare system. Indeed, I am not at all seeking to justify individuals who refuse to work at all. Rather, I seek to effectuate a cultural re-identification of employment with doing actual useful work – physical or mental – irrespective of how much, or how little, money that work earns. If wealth is not money but rather useful goods and services, then useful employment is any activity that generates useful goods and services. Some such activities happen to be highly compensated with money, either because there is large market demand for them or because they are subsidized by private institutions or governments. But other such activities arise out of individuals’ volunteer efforts, hobbies and interests, and desires to improve their immediate environment. An individual who devotes himself or herself primarily to the latter sorts of activities can be as worthy of respect and just as productive as an individual who makes a six-figure monetary income.

First, it is essential to recognize that either market value or institutional advantages that result in monetary subsidies are not necessarily a reflection of genuine wealth creation or usefulness. For instance, numerous products of high culture – including philosophy, literature, and classical music – are not in high demand among the masses, who simply do not understand such products. The creators of high culture will not earn as great an income on the market as the creators of light magazines and popular music. However, these same creators will contribute a much longer-lasting value to human knowledge, refinement, and moral standards for generations to come, whereas the creators of more popular works are unlikely to remain in demand for more than two generations. There is nothing wrong with this differential in compensation, per se, as people who do not appreciate high culture are entitled to vote with their dollars however they please. But this state of affairs does invalidate any notion that the amount of money one receives from one’s work is in any manner connected with one’s worth as a human being or one’s contribution to improving one’s own life and the lives of others – both in the short term and in the long term. Many creators of more refined works have even decided that it is unwise to try to make a living from such works and depend on their approval by a mass audience; instead, they have decided to subsidize their own creations and the dissemination of these works by means of a monetary income they earn from another occupation. This allows for works of high culture to be created exactly as the author intended them to be; if the author is talented and has a consistent vision, such works will be much more likely to endure long into the future.

Another important recognition is that some work is either impossible to transfer to the market given present technology or is prohibitively expensive to transfer. For instance, if I wish to go into my kitchen and get myself a beverage, it would be highly impractical for me to hire another individual to do this for me. If I get the beverage myself, I do not either collect or spend any money – provided that I already own the beverage, the glass, and the living space. But it cannot be denied that the act of getting the beverage was desirable to me and improved the quality of my life. Likewise, numerous actions that an individual performs to improve his or her own skills – such as reading books, practicing musical instruments, and doing mathematical problems – cannot be outsourced to other individuals and retain their value for the individual, which arises from the act of learning new skills that the individual himself would be able to use in the future. Indeed, it is true that all of us, if we have even the slightest desire to live well, will perform a wide variety of work every day for which we receive no monetary compensation at all! If we did not perform this work, it is unlikely that we would be in any position to earn any money, either.

A popular source of contempt in contemporary culture is the individual who, instead of leaving the home to work for money, chooses to remain at home and maintain it in good working order. This is, in my judgment, the single most egregious consequence of the fallacy that employment is the same as working for money. Working within the home – especially when supported by the monetary income of another family member – is a tremendously useful and life-affirming occupation; it facilitates a division of labor where various family members can specialize in the tasks they are most skilled at performing, thereby making good use of the principle of comparative advantage. Moreover, it enables a greater degree of care for any children in the household and provides a source of relief for those individuals who simply do not like working outside the home on a fixed schedule.

I note that there is nothing in this implying that any particular gender of individual should choose to stay at home, or that a family cannot function well if all of its members choose to work outside the home. Rather, I argue that a productive family can exist irrespective of which of its members do or do not choose to work for money. Indeed, for a family which has accumulated sufficient money and physical goods, it is possible to maintain productivity and a high standard of living even if none of its members earns a regular monetary income. Even if an individual has never earned any money in his or her life and, say, lives off a vast inheritance, it is still possible for that individual to perform useful and productive work. Indeed, one of the arguments that the great Austrian economist Friedrich Hayek made for the right of inheritance can be summarized as follows. Even if the vast majority of people who inherit their money will spend it unwisely, it is enough for one out of a thousand inheritors to be a great thinker and innovator. This individual, through his inheritance, will have the time and leisure to bring his vision to fruition, without needing to worry about providing for his day-to-day subsistence. The result could be a tremendous philosophical, technological, or artistic breakthrough that improves the lives of millions for centuries to come – and this result is worth the wasteful spending any other heirs might engage in.

Of course, the manner of productive work one does is often constrained by one’s current material situation. Many people will work for money, even if they wish to do something else, because they need the money to maintain the standard of living they wish to have. Increases in monetary income can go a long way toward improving both one’s access to leisure and one’s level of security and comfort. On the other hand, the same goals can also be achieved in part by spending less of the money one already earns and by living within one’s means – never letting one’s expenses exceed one’s income, which is akin to deficit spending for individuals, and not taking out interest-bearing debt, unless there is no other option, and the good the debt would fund could be seen as a necessity – such as a house. Devoting some time to managing one’s spending and establishing less expensive lifestyle choices is just productive as working to earn a salary increase.

If you wish to work to earn money, by all means do so. If you would rather focus on working in the home or doing volunteer work of any sort, this is excellent as well. Provided that one works and has useful outcomes to show for it, there is no need to feel any inferiority in one’s own case or any disrespect for others.

Read other articles in The Rational Argumentator’s Issue CCXX.

Why Unskilled Workers Do Not Need the Minimum Wage (2009) – Article by G. Stolyarov II

Why Unskilled Workers Do Not Need the Minimum Wage (2009) – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
Originally Published August 16, 2009
as Part of Issue CCIII of The Rational Argumentator
Republished July 24, 2014
******************************
Note from the Author: This essay was originally published as part of Issue CCIII of The Rational Argumentator on August 16, 2009, using the Yahoo! Voices publishing platform. Because of the imminent closure of Yahoo! Voices, the essay is now being made directly available on The Rational Argumentator.
~ G. Stolyarov II, July 24, 2014
***

I was recently asked whether one justification for the minimum wage might be a lack of genuine bargaining power among unskilled workers, as compared to high-skilled workers. The argument implicit in the question was that a specific unskilled worker can give his employer no reason to retain him in particular, and so the employer can afford to push down the unskilled worker’s wage to a ridiculously low amount. At the same time, the unskilled worker cannot find any opportunities to work elsewhere. I do not think that such suppositions are realistic, however.

Let us compare unskilled workers with workers who have specialized skill sets. High-skilled workers do indeed have more bargaining power within their specific places of employment, as they are more difficult to replace and more valuable to their employers. However, they also have fewer competitors to whom they could go if their current employment situation does not turn out to their liking. This is because a narrower range of employers would demand a worker with a certain specific skill set than would demand a generic unskilled worker. An unskilled worker can earn his maximum current possible income working in, say, a factory, a fast-food restaurant, or a custodial job for a variety of employers. A skilled accountant, on the other hand, can only earn his maximum current possible income working as an accountant, if that is his most valuable skill according to the market.

Both the skilled and the unskilled worker will tend to earn the marginal product of their labor – i.e., the amount of value that their labor contributes to the product they create – in a truly free market. The skilled worker will earn this because of his high bargaining power. The unskilled worker will earn this because he has so many alternatives with regard to employers. If the current employer does not pay the unskilled worker his marginal product of labor, numerous other employers will try to bid away the work of that person by offering slightly higher wages. Say, for instance, unskilled worker X has a marginal product of labor of $5 per hour, but he is only paid $1 at his present job with Employer A. Employer B sees a lucrative opportunity if he could hire X at $2 per hour and keep $3 of X’s hourly product for himself. So X is hired by B at $2 per hour. Now Employer C sees a lucrative opportunity if he could hire X at $3 per hour and keep $2 of X’s hourly product for himself. So X is hired by C at $3 per hour. This will tend to keep happening until X is hired by an employer who pays him his marginal product and therefore creates a situation where X cannot be bid away by a competitor offering higher wages.

This is a dynamic process, and it takes time to attain. In the meantime X’s skills might be improving as a result of on-the-job training and experience – so his marginal product might increase still further, and “equilibrium” might never be fully attained. Nonetheless, the market process functions to relentlessly approach equilibrium by means of the perceptiveness of entrepreneurs, motivated by profit and desiring to out-compete their rivals by means of greater perceptiveness and by offering better terms to employees and customers.

I do not think there is ever truly a situation where a worker has “no choice” about where to work. Moreover, I do not think there is ever a situation where a healthy human being is forever condemned to earn a low wage. A low initial wage is an excellent opportunity for many workers to gain the knowledge and experience necessary to earn higher wages in the future. There is no better job training than training on the job – as every job I have ever had demonstrated to me. By prohibiting people from working for pay below a certain level, the minimum wage laws deprive many workers of the opportunity to gain such invaluable experience.

Click here to read more articles in Issue CCIII of The Rational Argumentator.

Slogans or Science? – Article by Sanford Ikeda

Slogans or Science? – Article by Sanford Ikeda

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The New Renaissance Hat
Sanford Ikeda
May 20, 2014
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The debate over raising the legal minimum wage (LMW) to $10 an hour has people on both sides saying things they should know better than to say. For example, a friend recently posted the following meme (which isn’t the worst I’ve seen) on Facebook:

One year ago this week, San Jose decided to raise its minimum wage to $10/hour.

Any jobs disappear?

The number of minimum wage jobs has grown.

Any businesses collapse?

The number of businesses has grown.

Any questions?

Yes, several, but I’ll get to those in a bit.

Memes like these are just as silly and misleading as the simplistic arguments they’re probably attacking. In fact, the economic analysis of significantly raising the minimum wage says that, other things equal, it will reduce employment below the level where it would otherwise have been. It doesn’t say that that employment will fall absolutely or businesses will collapse.

A little thinking can go a long way

Have a look at this chart published in the Wall Street Journal. At first, it seems to support the simplistic slogans. But it’s important to compare similar periods, such as March–November 2012 (before the increase was passed) versus March–November 2013, (just after it went into effect). The LMW increase wasn’t a surprise, so in the months before it was passed, businesses would have been preparing for it, shaking things up. Comparing those two periods, which makes the strongest case for the meme’s assertions, the total percentage increase in employment (the area under the red line) looks pretty close, going just by my eyeballs and a calculator. In fact, the post-hike increase might actually be smaller, but you’d need more data to be sure. So if you compare similar periods, the rate of employment growth seems not to have been affected very much by the hike. So is the meme right?

According to that same chart and other sources, hiring in the rest of California and the country, where for the most part there was no dramatic increase in the LMW, was also on the rise at pretty much the same time. Why? Apparently, the growth rate of the U.S. economy jumped in 2012, especially in California. So the demand for inputs, including labor, probably also increased. I’m certainly not saying this correlation is conclusive, but you could infer that while hiring in San Jose was rising, it wasn’t rising as fast as it might have otherwise, given the generally improving economy.

That’s a more ambiguous result, and of course harder to flit into a meme.

You are stupid and evil and a liar!

Those strongly in favor of raising the LMW cast opponents as Republican apologists for big business. Take this post from DailyKos, which apparently is the source of the above meme. The author writes, “Empirically, there’s no clear negative effect that can be discerned. The concerns of Teahadists like Paul Ryan and Marco Rubio is [sic] rather unfounded in academic literature and in international assessments of natural experiments.”

Now, the overwhelming conclusion of years of economic research on the effects of a minimum wage on employment is that it tends to increase, not lower, unemployment. As this article from Forbes summarizes, “In a comprehensive, 182-page summary of the research on this subject from the last two decades, economists David Neumark (UC-Irvine) and William Wascher (Federal Reserve Board) determined that 85 percent of the best research points to a loss of jobs following a minimum wage increase.”

So, saying there is “no clear negative effect” is an outrageously ignorant claim. And there’s not one mention of the economic evidence that significantly raising the LMW will hurt the very people you wish to help: the relatively poor. But why address solid scientific research when there’s sloppy sloganeering by politicos to shoot down?

Attacking easy targets is understandable if you want to vilify your opponents or win an easy one for the cause. In that case, you take the dumbest statement by your rival as the basis of your attack. Such is the way of politics. In intellectual discourse, however, you may win the battle but you’ll lose the war. That is, if your goal is to learn from fruitful intellectual discussion, you must engage your opponent’s best arguments, not her weakest ones.

Let me use a counterexample. The sloganeering approach to attacking those who oppose raising the LMW is the equivalent of someone saying: “Well, this past winter was one of the coldest on record in the Midwest. So much then for global warming!” That may be “evidence” in a mud-slinging contest, but it’s not science.

What’s the theory?

While weather is complex and unpredictable, economic systems are even more so. Does that mean there are no principles of economics? Of course not. In fact, it’s because of such complexity that we need whatever help economic theory can offer to organize our thinking. And it doesn’t get any more basic than this: The demand curve for goods slopes downward.

That is, other things equal, the costlier something is, the less of it you’ll want to buy.

Note that the caveat—other things equal—is as important as the inverse relation between price and quantity demanded. That’s why my earlier back-of-the-envelope analysis had to be conditional on more data. Unfortunately, those data are often very hard to get. Does that mean we abandon the theory? Well, that would be like letting go of the rope you’re hanging on to for dear life because you’re afraid it might break.

So what exactly is the theory behind the idea that raising the LMW will increase hiring low-wage workers and boost business? If raising wages will actually increase employment and output, then why not also mandate a rise in interest rates, rents, electricity rates, oil prices, or the price of any of the other myriad factors of production that businesses ordinarily have to pay for? I would hope that this idea would give even the meme promoters pause.

As far as I know, the only situation in which forcing people to pay a higher wage rate will increase employment is when there is a dominant employer and there are barriers to competition. Economists term this “monopsony,” a situation that might occur in a so-called “factory town.” There, the dominant employer (of labor, capital, land, or whatever) can lower what she pays for inputs below the revenue that an additional unit of input earns the company. I would love to hear that argument and challenge it, because it’s the strongest one that standard economics can offer in favor of coercing businesses to raise wages. But so far I’ve not come across it, let alone any discussion of the economic literature on monopsony in the labor market, most of which questions its relevance. Some almost random examples are here and here.

Margins of analysis

Finally, economics teaches us that we can adjust to a particular change in different ways. In a thoughtful article on the effect of the LMW increase in San Jose that all sides of the debate should read, we get the following anecdote:

For his San Jose stores to make the same profit as before the wage increase, the same combo meal would be $6.75. “That would chase off a large percentage of my customers,” Mr. DeMayo said. He hasn’t laid off San Jose workers but has reduced their hours, along with some maintenance such as the drive-through lane’s daily hosing, and may close two unprofitable stores.

Employers can adjust to higher costs in one area by cutting back on spending in others. That might mean less unemployment than otherwise, but it doesn’t mean that raising the LMW has no negative employment effect at all. It means that the effects are harder to see. There’s that darn “other things being equal” again!

Slogans and memes are no substitute for science, or even clear thinking.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
A College Degree Does Not Make You a Million Dollars – Article by Andrew Syrios

A College Degree Does Not Make You a Million Dollars – Article by Andrew Syrios

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The New Renaissance Hat
Andrew Syrios
April 13, 2014
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It is becoming substantially less difficult these days to convince people that college is not a sure fire way to the good life. Even Paul Krugman has conceded that “it’s no longer true that having a college degree guarantees that you’ll get a good job.” You can say that again: 53 percent of recent graduates are either jobless or underemployed. Unfortunately, myths die hard. Many people still believe as Hillary Clinton once said, “Graduates from four-year colleges earn nearly an estimated one million dollars more [than high school graduates].” This may sound convincing, but this figure — based on a Census Bureau report — is about as true as it is relevant.

After all, isn’t it true that the most hard-working and intelligent people tend more to go to college? This is not a nature vs. nurture argument, the factors behind these qualities are unrelated to the discussion at hand. If one grants, however, that the more ambitious and talented go to college in greater proportion than their peers, Mrs. Clinton could have just said “the most hard-working and intelligent earn nearly an estimated one million dollars more than their peers.” I think the presses need not be stopped.

For one thing, the Census Bureau estimate includes super-earners such as CEO’s which skew the average upward. Although some, such as Mark Zuckerberg and Bill Gates, didn’t graduate college, most did. This is why it’s better to use the median (the middle number in the data set) than the mean or average. It’s also why Hillary Clinton and other repeaters of this factoid don’t.

Furthermore, just because most smart people go to college doesn’t mean they should. They may earn more money, but what they keep is more important than what they make. Financial columnist Jack Hough created a very illuminating hypothetical scenario with two people, one who chooses college and one who enters the labor force after high school. Hough then uses the average cost of college as well as U.S. Census Bureau data for the average income of college graduates and non-graduates, adjusted for age. He assumes both save and invest 5 percent of their income each year. By the age of 65, how does the net worth of each look?

  • College Graduate: $400,000
  • High School Graduate: $1,300,000

When one thinks about the common narrative of college vs. no college, it truly becomes absurd. Indeed, who exactly are we comparing? We’re not only comparing Jane-Lawyer to Joe-Carpenter, but we’re also comparing financial analysts with the mentally disabled, medical doctors with welfare dependents, building engineers with drug addicts, architects with pan handlers, marketing directors with immigrants who can barely speak English, and university professors with career criminals (whose earnings, by the way, are rarely reported). Many of these troubled people didn’t graduate high school, but it is shocking how they shuffle kids through the system these days. Some 50 percent of Detroit high school graduates are functionally illiterate and it isn’t that much better for the country on the whole. And something tells me that these particular non-graduates need something other than four years of drinking and studying Lockean (well, more likely Marxian) philosophy.

It certainly could be a good thing to earn a college degree. If one wants to be an accountant, engineer, or doctor, a degree is required. And those jobs have very high incomes. But can one really expect to make a killing with a degree in sociology or Medieval-African-Women’s-Military-Ethnic Studies? Pretty much the only jobs those degrees help one get, in any way other than the “hey, they got a college degree” sort of way, are jobs teaching sociology or Medieval-African-Women’s-Military-Ethnic Studies. And that requires an advanced degree as well (i.e., more money down the tube).

Furthermore, a college degree does not even guarantee a particularly high income. CBS News ran an article on the 20 worst-paying college degrees. The worst was Child and Family Studies with a starting average salary of $29,500 and a mid-career average of $38,400. Art History came in 20th with a starting average of $39,400 and a mid-career average of $57,100. Other degrees in between included elementary education, culinary arts, religious studies, nutrition, and music.

These are decent salaries, but are they worth the monetary and opportunity costs? With the wealth of information on the Internet, many skills can be attained on one’s own. Alternatives to college such as entrepreneurship and apprenticeship programs are often ignored. Indeed, apprentices typically get paid for their work while they are learning. The average yearly wage of a plumber and electrician are $52,950 and $53,030 respectively. That’s better than many college degrees and comes without the debt.

And that debt is getting bigger and bigger as college tuition continues to rise. In the last five years, tuition has gone up 24 percent more than inflation. Including books, supplies, transportation and other costs, in-state college students paid an average of $17,860 for one year in 2013 (out-of-state students paid substantially more). And despite all of that, many students don’t even finish. According to US News & World Report,

Studies have shown that nonselective colleges graduate, on average, 35 percent of their students, while the most competitive schools graduate 88 percent. Harvard’s 97 percent four-year graduation rate might not be that surprising … [but then] Texas Southern University’s rate was 12 percent.

12 percent is simply ridiculous, but the 35 percent for nonselective schools is extremely bad as well. Even the 88 percent for competitive schools leaves 12 percent of their students with no degree, but plenty of debt.

Given all of that, it can’t be surprising that the default rates on student loans (which cannot be wiped away in bankruptcy) appear to be much higher than is typically reported. According to The Chronicle,

[O]ne in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions …

[T]he government’s official “cohort-default rate,” which measures the percentage of borrowers who default in the first two years of repayment and is used to penalize colleges with high rates, downplays the long-term cost of defaults, capturing only a sliver of the loans that eventually lapse …

College is good for some people. If you want to go into a field that has high earning potential (engineering, medicine, accounting, etc.) or you really like a certain subject and want to dedicate your career to it even if it may not be the best financial decision, go for it. But don’t go to college just because as Colin Hanks says in Orange County, “that’s what you do after high school!”

Andrew Syrios is a Kansas City-based real estate investor and partner with Stewardship Properties. He also blogs at Swifteconomics.com. See Andrew Syrios’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.