Is the Internet killing jobs?

Awhile back I wrote how the Internet is an incredible bargain.  I pointed out that we get high amounts of consumer surplus from the Internet.  In short, the Internet has been really good for consumers.

Job-destroying Technology

Yet, the other side of the Internet is that it inevitably destroys jobs.  For example, the ability to email PDFs across town for signatures probably caused some bike messengers to lose their jobs.

In fact, this isn’t just an issue with the Internet, it is an issue with all new technologies.  The car put a lot of buggy makers and blacksmiths out of work.  Then, several decades later, robots “took” auto assembly line workers’ jobs.  New, efficiency-enhancing technologies that make consumers’ lives better and lower costs tend to also destroy jobs.  At least since the Industrial Revolution, there have always been cries about job-destroying technologies.

First, let me say I am quite sympathetic to the plight of workers whose skills are superseded by new technologies.  A callous attitude claiming such workers should have been smarter about what field they trained for won’t do. (Very few people predicted the Internet 30 years ago.)  That doesn’t mean we should reject technological change from happening, but I am more willing to consider government help to these workers than most other areas.  (Of course, we need to be wise about how such help is administered.)

Yet, acknowledging that technology destroys jobs and stopping there is missing the forest for the trees.  Discussing this issue in my classes, I like to mention the agricultural industry in the US.  In 1900, approximately 38% of the U.S. labor force was employed in farming, but today only 2% farms.  Yet, despite this decline in farm employment, food is cheaper and more abundant in the U.S. than ever.  In 100 years, we went from over a third of our population being needed to supply the nation with food to only one fiftieth (1/50!).  The main reason, of course, is that farming became much more efficient through technological innovations.  (Here is a good history that also notes the role of agricultural extension programs in trying to make farming more efficient.  That is, the government encouraged job destruction.)

So, should we conclude this massive change in agricultural was a bad thing?  After all, it destroyed millions of job.  Do you think we would be better off if 38% of Americans still had to farm so we could all eat?

Look at Both Sides of the Coin

Often it is easier to consider a question from a distance.  Today, technology like the Internet is destroying jobs and it is hard to see the bigger picture.  The short-run pain is most salient.  But, thinking about the great change in farming in the 20th Century might help us think about the long-run impact of the Internet.

You see, in the long run, America was better off with a more efficient agricultural sector.   Why?  Because agricultural products became cheaper, and because this freed-up labor resources for other things.  Millions of ex-farmers were now available to produce other goods.  Millions migrated from rural areas to cities and began working in factories which made new products never before available.

Of course, the personal and emotional costs were real (which is why I am sympathetic to those affected by structural economic changes), but please realize that this shift in how the economy allocated resources is a big part of why we live lives of abundance and leisure today.

As farming became more efficient, Americans spent a smaller portion of their income on food which in turn meant they could buy other things they couldn’t previously afford.  This demand for “other things” created new jobs.  Economic growth is all about populations producing more with less inputs (such as labor).  The economy can then allocate that unused labor to produce other goods.  For the economy as a whole, history has shown that technology ultimately creates more jobs than it destroys.

When we see technology destroying jobs, we should be compassionate toward those adjusting, but we should also realize it is a good thing too.  If in 1900 you were told millions of farming jobs would be lost in the coming decades, you might have imagined a nation of high poverty and unemployment.  You might think of the Great Depression as a period of painful adjustment away from agriculture.  Yet, despite some pains of adjustment, America today is a country of plenty with relatively low unemployment and high amounts of leisure time (yes, even now).

So, What About the Internet?

The changes in agriculture should make us optimistic about the changes caused by the Internet.  Both affected virtually all parts of the country.  Both destroyed millions of jobs.  And, both have given us much better lives.  I bring this all up, because there is a new study which tries to quantify the economic impact of the Internet.  As with agriculture, the news is good.

In terms of jobs, the authors find that for every 1 job destroyed by the Internet, 2.6 are created.  One step back and 2.6 steps forward means we end up with 1.6 more jobs than before.

This all goes back to a recurring lesson from economics:  we must consider both the “seen” and “unseen.”  It is easy to “see” the jobs displaced by the Internet (e.g. bike messenger), yet the jobs created are “unseen” because they are spread all over the complex economy.

(I’d recommend looking through the report.  Another fun fact related to a previous post:  the authors find the Internet provides 20 Euros of consumer surplus per month per Internet user.)

How “hipsters” are like the pioneers

“Hipsters” are that hard-to-define but you-know-it-when-you-see it segment of the population that is self-consciously counter-cultural.  When I think of a hipster, I think of someone who explores the fringes of culture in music, fashion, and technology.

There is plenty of disdain directed at hipsters, but I think they are just an easy group for stressed-out, over-leveraged Americans to kick around. (Remember what your parents taught you: “People make fun of others to feel better about themselves.”)  I want to point out from an economic perspective what an incredible service hipsters provide for all of us non-hipsters.

Have You Thanked A Hipster Lately?

I’ve written several times now about what economists call “externalities” (for example, here, here, here and there.)  A positive externality exists when something you do beneficially affects an un-related party.  For example, you may plant flowers for your own enjoyment but everyone else passing by also gets to enjoy them.  Thus, you exert a positive externality on the passer byes.

One characteristic common to many hipsters is “early adoption,” most notably in the area of technology.  Hipsters tend to try out new technologies such as smart phones before the rest of us.  They do it because they enjoy trying out the latest items on the market.  Yet, this inadvertently benefits everyone else.

Being an early adopter is a double-edged sword.  It means you are “first,” but it also means you get burned more often too.  New technologies tend to have flaws which get fixed in later versions.  Some new products turn out to be less than promised.  An early adopter takes-on this risk and then tells everyone else if a product is good or not.  Early adopters exert a positive externality on non-early adopters.  They take the risk of buying a piece of junk and then help us non-hipsters know which items are good and which are bad.

Hipster Housing

Hipsters don’t just tend to be early adopters of technology.  They also tend to find “new” areas of a city to live in.  Usually these hipster havens are older, slightly sketchy, parts of a city with relatively good proximity to transportation and downtown.

These areas are not the kind of places “normal” people would feel comfortable moving into.  Real estate agents don’t bother to show families even reasonably priced homes in these areas.  Yet, hipsters seem to act as pioneers who take more risk than their parents would advise.  They take a risk and move into such areas much like early pioneers took some risks to go West.  With both hipsters and pioneers, there is a payoff (affordable property, 40 acres).  But, there is a risk too (crime, death by scalping).

Again, however, hipsters provide a really great benefit for everyone else.  They find these forlorn parts of the city which in turn helps to clean up the area which in turn makes it more appealing to non-hipsters.  Hipsters take all the risk but then others can reap the benefits.  Hipsters provide free, valuable information to all those people making fun of them.  In many places, gentrification occurs which raises property values and tax revenues.  Perhaps the best recognized example of this is Williamsburg, Brooklyn.

What Makes a Hipster?

I’m trying to think about whether a higher willingness to take on risks is almost a fundamental characteristic of “true” hipsters (not the tag-along imitators).  It would be interesting to learn whether these hipsters are less risk-averse (or even risk-loving) by standard measures used in economics laboratory experiments.

My wife showed me this the other day:  the hipster trap!  If a greater propensity to take on risk is a hipster trait, then this picture has a whole new deeper meaning!

HT: Tim (whose last name becomes “Hipster” if you add one letter), for a discussion that lead to this post.

If you missed my explanation today for why I came back to blogging, you can read it here.  If you are really out of the loop, here is why I left blogging a few weeks ago.

Don’t Hurt Others When You Name Your Baby

A friend recently told me he was glad he could give his son a name that “carried on the family name.”  Because he had a son, his last name would propagate, and by “re-using” a family first name he could honor other relatives.  This resulted in a non-unique name, one that dozens of other people likely also hold.

As I’m sure it did for you, this naturally directed my mind toward negative externalities.  A negative externality occurs when an action you take adversely affects an uninvolved person.

I’ve explained before how becoming a parent yields a positive externality on society.  But, giving your baby a non-unique name causes negative externalities on everyone else.

Information Overload

Parents choose names for their own benefit and their child’s (as I have explained before).  When parents choose a name they arguably are not thinking about how their choice will affect everyone else in the world.

By giving their baby a non-unique or common name (e.g. John Smith), parents make it harder for the rest of society to find a specific person with that name.  If a person is named “Xyzapple Sugar Smith,” they will be easy to find in Facebook, Google, or the phone book.  However, there are thousands named “John Smith,” and naming your baby “John Smith” makes it even harder for anyone else searching for a certain John Smith.  Finding a certain John Smith via Google is like looking for a needle in a haystack.  These parents just added another piece of hay to the haystack!

If everyone would just given their kids unique names then it would make it easier for everyone to find everyone.  If you want to “do unto others as you would have them do unto you” then you will give your child a unique name.  Celebrities seem to be best at this.  Penn Jillette is doing his part for society, naming his child Moxie CrimeFighter.

Presidents, Princesses, and Serial Killers

Above, I explained how parents hurt everyone by giving non-unique names because this makes it harder for everyone to find a specific person.

However, some parents will actually do substantial, irreparable harm to specific individuals by their name choice.  For example, if your child becomes an unpopular president this may decrease the “value” of his or her name.  Other people with that name will then be stuck with the same name as a lousy president.  I have explained before and offered empirical evidence for this.

Also, let’s say you are named Kate Middleton (but not the KM).  Suddenly, you can be sure your name will never, for the rest of your life, show up in Google.  Parents of the Kate Middleton have imposed an enormous burden on you because you have been essentially wiped from the internet.  If you are a lawyer, try to get to the top of Google search.  If you run for office, try to make your campaign website stand out.  Good luck.

Lastly, consider those poor, law-abiding people who happen to be named Ted Bundy or Timothy McVeigh, monikers of a serial killer and terrorist, respectively.  The criminals’ parents have imposed very real negative externalities on others.  If you are a salesman, try making cold calls with that name! (Update:  My unofficial fact-checkers have alerted me that Ted Bundy was originally named “Theodore Robert Cowell.”)

Of course, the parents don’t know their kids’ names will ultimately have this effect.  Yet, in expectation every parent should believe this could happen.  Unless the parent knows their child will be unremarkable and law-abiding (which they don’t), there is a positive probability they will hurt someone else quite badly by giving their child a non-unique name.

Solutions

Anyone who paid attention in Econ 101 knows the standard solutions to negative externalities are to tax the behavior or establish property rights.  Either is a possibility here.

If parents want to choose a non-unique name, the government could impose a tax on this decision which would encourage parents to choose unique names.  Or, perhaps better, you could get a subsidy (=opposite of a tax) for choosing a unique name.  Instead of a $2000 child tax credit, parents choosing a unique name might get a $2500 credit the first year.  If perfect uniqueness is too strict, there could be a sliding scale based on how prevalent a name is.

Another approach would be for parents to obtain property rights for a name (much like web domain names).  The government could auction off the ordering for choosing a name, like a sports draft pick.  Once someone has that name, it is theirs alone.

Both arrangements, a tax/subsidy or naming rights, would encourage diversity in names.  Not only would this reduce the negative externalities parents are imposing but it might also help poorer members of society.  Economists have shown that “different” names, often associated with ethnic groups, can hold people back in the job market.  However, if “different” names became the norm this might prevent employers from using the names as a basis for discrimination.

Do unto others and name your kid uniquely, but not too uniquely.  Names that are difficult to read, say, and spell could impose other negative externalities!

http://www.huonvalley.tas.gov.au/site/page.cfm?u=260

This article makes a related point about drug name confusion.  Here is some interesting stuff about Disney establishing property rights over “Seal Team Six.”

Coupon Economics

An old friend and faithful blog reader, TM, asked me to write about coupons.  Turns out, there are TV shows about “extreme couponing.”  I’m glad TM wrote because discussing coupons gives me the chance to introduce one of my favorite concepts in economics.

To Coupon on Not to Coupon?

Why doesn’t everyone clip coupons?  Aren’t we (and I am not a coupon guy) leaving money on the table when we unceremoniously trash the coupon-related junk mail?

Economics offers a straightforward answer:  it takes too much time and effort for some people to coupon.  Deciding to do any activity requires balancing the costs versus the benefits.  With couponing, the costs are time, effort, and organization.  You might also not get to buy the exact brand you want when you want it.  For a typical family, the most extreme couponista might zero-out her food bill and save $5000 – $7000 per year.  This benefit must then be measured against the costs of time and effort.

Like most decisions, thinking about one’s opportunity cost is appropriate.  We must ask what one could be doing with her time and energy if she weren’t couponing.  For many people, even $5000 a year isn’t worth it.  $5000 per year breaks down to $20 per weekday.  Plenty of well-paid, working people would rather spend their leisure time (say from 6 to 10pm each night) playing with kids or watching TV rather than be paid $20 to give up some of this activity.  I personally would dread coming home each day if it meant someone handed me an Andy Jackson and then I had to coupon for an hour.

This all implies those with low opportunity costs of couponing (relative to income) will in fact coupon.  Those with low opportunity costs will disproportionately be those with flexible or non-existent work schedules and easy to manage kids.  Or, it might be those with low incomes such that $20 a day is quite valuable.  Or, we might find people who derive enjoyment out of the couponing itself which makes their payoff $20 per day PLUS the enjoyment.

My casual observation is the lower-income and/or stay-at-home moms tend to be the serious couponers, which agrees with the simple economic prediction outlined above.

Why Do Coupons Exist?

Are companies leaving money on the table by offering coupons?

The basic reason for a coupon is explained by “price discrimination.”  Price discrimination is when a firm sells the same good to different customers at different prices.  In this case, “discrimination” should not have a negative connotation.  It just means firms are able to make a distinction between customers.  Price discrimination is one of my favorite concepts because once you know what it is you see it everywhere.

Imagine there are two types of grocery shoppers.  Type A is very price-sensitive, watches sales closely, shops around, knows a good deal and waits to get a bargain.  These types would do well on The Price Is Right because they know how much everything costs.  Type B is less price-sensitive, doesn’t watch for sales, and more or less walks into a store and buys what they see.

When you walk into a store, firms would love to know if you are Type A or B.  That way they could offer “special prices just for you.”  In short they could  “discriminate” between the two types of consumers and charge each the most she is willing to pay.

In practice, firms can’t typically sort their customers this way.  They have to list one price on the shelf.  Here is the problem:  if the firm sets the price high, then Type B will still buy but Type A won’t.  If they price low, then both A and B will buy buy the firm will leave a lot of money on the table.  Coupons let firms charge Types A and B different prices without having to ask customers what type they are.

In many cases, being a Type A customer will correlate with having low opportunity cost for couponing.  Those who are willing to coupon also are often more sensitive to price.  This means firms can offer coupons and let the customer reveal which type she is.  Customers (Type B) who are less price-sensitive and highly value their leisure will ignore coupons and pay higher (listed) prices.  Price-sensitive customers (Type A) will use the coupons and pay lower prices.

Coupons allow firms to charge different customers different prices without having to list different prices or find out which type each shopper is.

Is Extreme Couponing Good?

When a customer takes couponing to the extreme, isn’t it just a suck on the economy?

I would argue that firms see the very small group of extreme coupon clippers as the unavoidable cost of being able to price discriminate.  The benefits firms get from being able to price discriminate must exceed the losses from what they give away to extreme couponers.

Certainly, extreme couponers have figured out a way to work the system.  I don’t see that as morally objectionable in this case since private companies are allowing it.  Though, note that restrictions on how coupons can be used are attempts to limit the volume of freebies.  Coupons are not so easy that you can pick up a free pamphlet and walk out with half the store.

However, if technology makes extreme couponing widespread, I guarantee firms will modify how coupons can be used.  I can imagine an entrepreneurial coupon guru setting up a website that allows you to enter your preferences about what you like to eat each week.  The website would then source all the necessary coupons for you at your local store and generate a shopping list so you can minimize your bill.  The cost of couponing would be dramatically reduced.

If zeroing-out your grocery bill became automated and easy, you can bet firms would change their game.  Right now, couponing is too costly for enough people that firms still benefit from being able to price discriminate.

Firms Try to Figure Out Willingness to Pay

It should be no surprise firms want to charge as much as possible.  Couponing is one way to do this, but firms would really like to find out more about just you.  How much will you pay?

Whenever possible, firms try to find out this information.  One example is a car sales man.  When you go to buy a car, you might think the guy is just being nice asking about you.  In fact, he is trying to find out your willingness to pay.  He will ask about your job.  Whether you have owned that brand before.  What part of town you live in.  How long you have been looking.  Why you need the car (e.g. if you are having a baby in 2 days you might be much more willing to pay for car seat space).  A famous study also shows he will consider your race and gender.  In general, he is trying to determine “special price for YOU.”

Another example is how online stores might/do determine your willingness to pay based on your online activity.  Amazon was doing this in the past.   If they know you buy every new book by a certain author, they might raise the price.  Yet, if they see you are shopping around for the book they might give you a more competitive price.  I’m not sure “clear your cookies” in this case would always be the best advice.

http://eco-officegals.com/2011/04/20/coupons-for-the-eco-friendly/

Pirates Attack the Few Fans They Have

This story came across the local news report last night:

A sign in front of the bar on Fairhaven Road said, “If the Pirates lose, you win.” The promotion called for a discount of a nickel off a pitcher of beer after every loss by the Pirates, who haven’t had a winning season since 1992.

An email sent on May 12 by Pirates account executive Angela Criscella said, “An occasional joke and jab is expected here and there, but to create business by ripping on the home team is ridiculous and in my opinion distasteful.” She urged bar patrons to “take your business away from the Stroll Inn and to other local restaurants instead.”

Forget that the Pirates organization has no sense of humor.  I don’t like people that can’t laugh at themselves, but there is an economics lesson here too.

This bar actually presents a valuable opportunity to rational economic agents.  The bar presents the opportunity for customers to use a strategy with will help them maximize their utility.  It is called hedging.   From Wikipedia:  A hedge “is an investment position intended to offset potential losses that may be incurred by a companion investment.”

If you are a Pirates fan, you presumably get positive utility when they win and negative utility when they lose.  If you patronize the bar in question, you can hedge against a loss by your team.  You may be upset they lost but you will be somewhat compensated by cheaper beer.  Things aren’t as bad as they would have been.

To be clear, the Pirates organization’s “boycott” of this bar is essentially an attack on the (dwindling set of) people who actually give a flip about the Pirates.  The club must not be satisfied with losing seasons.  Apparently, they want no fans either.  Brilliant.

If you missed my morning post about “finding your pond,” you can check it out here.  To read all of my blog, go here.

What Size Pond Should You Choose?

I’ve been thinking about where people choose to locate.  I also discussed how big cities attract those looking for big success, yet this brings with is a high chance of failure.  In many ways this boils down to choosing the right “pond” size and considering how big a “fish” one is.

What I mean is that most people care about “status” quite a bit, and we determine our status based on those around us.  We compare ourselves to those in our “pond.”  If you want higher status you can either 1) become a bigger fish, or 2) choose a smaller pond.

I’m not necessarily condoning status-concerns as how we should live our lives, yet as a matter of positive economics it helps me understand human behavior.  For example, I already wrote how some parents might signal status by their choice of a baby’s name.

Pond Choice

It is kind of funny, but perfectly human, to say “We are the champions…of the West Podunk six-man football league, ages 7 to 9 who were born on Tuesdays.”  We constantly define “ponds” in ways that make us feel good about ourselves.  “I got the highest grade in the class” or “I hit the most runs in April.”  You might be valedictorian of your small, regional college and this will make you feel good even though you might be a below average student at an Ivy League.

We all, both consciously and sub-consciously, choose our ponds to our benefit.  This is actually a good thing because most of us care how we stack up against others.  If there was only one pond then all but one of us would be “losers.”  By defining more ponds and then choosing our ponds we can all be pretty big fish somewhere.

Related to major life decisions, there are at least four major pond choices:  where to go to school (esp. college), where to live (both city and neighborhood), where to work (both company and industry), and who to be in relationships with (e.g. spouse and close friends).  These decisions might be described as a maximization problem in which a person with a given concern for status tries to be in the biggest pond for which he can be successful enough to be “happy.”  I’ll call this the “optimal pond problem.”

There are of course trade-offs across pond types too.  Being a lackluster Harvard student (i.e. small fish in the Harvard pond) will mean you are a bigger fish in the national pond than the valedictorian of a directional state school.

Presumably one also wants to reduce the pain of ending up as a small fish in a big pond.  It might be more enjoyable to be the mayor of a small city rather than try and fail to be the mayor of a large city.  You might prefer being the boss of a small company no one has heard of rather than an equally-paid middle manager at General Electric.

Choosing the right pond, however, can be difficult because we tend to overestimate our abilities.  We need to figure out how we compare.  To do so, it seems like a good strategy to go to the best schools possible and while there try to interact with those in other schools too (for example, via collegiate competitions).  This will better inform you about how big a fish you are.  (I knew many top-students from small town high schools who failed-out of first year engineering.  Perhaps by no fault of their own, they were lead to believe they were bigger fish than they were.)  Once you have a better idea about your fish size, you can choose your city and work sizes better.  This is commonly called a “reality check.”

More Ponds Everyday

We should all admit we are quite good at mentally building new ponds.  If we don’t feel great about how we stack up, we might arbitrarily censor the observations around us.  We are creating new ponds all the time.

Yet, in the information age, other ponds are now available.  For example, an awkward kid with quirky interests might be a small fish in his hometown.  But, online he might find hundreds of other enthusiastic collectors of air sickness bags.  He might find he is the #1 expert in this area in the whole world.  From zero to hero just by switching ponds!

The proliferation of ponds through technology implies we all should be able to be high-status somewhere.

http://www.pond-o-mania.com/fishpondfilterpumps.html

The Educational Industrial Complex

A new paper by Nobel Economist James Heckman is incredibly interesting if you care about the present and future of lower-income Americans.  He discusses why the War on Poverty failed, the importance of families in skill production, and why later-life interventions are not cost effective.

His argument is as follows:

1.  A lack of skills and not opportunity is the main challenge affecting workers of all racial groups.  In particular, a lack of soft skills hurts many workers.

2.  Families play a hugely important role in skill production.  While some of this is genetically transmitted, the family matters a lot.  Unfortunately, more and more kids are being raised in dysfunctional families.

3.  Very early involvement a child’s life is the most cost-effective intervention and this is best done by the family.  Public or private interventions need to figure out how to help families raise kids better early on without violating the sanctity of the family.

You should read the whole thing.

Educational Industrial Complex

I am predisposed to Heckman’s argument, especially the importance of family over later-in-life school intervention.  Virtually every teacher I know will say there is only so much the schools can do.  Testing, class size, charter schools might (or might not) be good, but teachers see a deficit of parenting as critical main hurdle.  Teachers feel like the positive impact they make is swamped by the negative impacts of dysfunctional families that have accumulated over the child’s life.  As the paper points out, even a pre-school teacher is a couple years too late.  A lot of damage has already been done to a kid with poor-quality parents.

Heckman pleads:

American public policy has to shift to acknowledge that the core skills needed for success in life are formed before children enter school. [bold in original]

By our nature we want to be gods who can engineer society.  We want to solve the educational problems with testing, class-size reductions, charter schools, technology in classrooms, Teach for America, merit pay, and so on.  What I call the “educational industrial complex” has blossomed to meet this demand.

Yet, if Heckman is right most interventions are, at best, investments with a low rate of return.  We must admit even 5 year-olds cannot be easily molded into productive citizens by a well-trained education army .  We must relinquish the belief in our collective ability to educate and admit families matter.

(This does not mean we shouldn’t try to make schools better.  My point, and Heckman’s, is that a budget constrained society may need to realize the cost effectiveness of the educational industrial complex relative to family-based approaches is poor.  We might need to think about spending resources differently.)

How to Improve Parenting

Heckman tries to show you get the most bang for your buck by targeting children at a very early age.  He also emphasizes a “government as parent” model is disastrous.  Individuals, private organizations, and the government should be asking how they can help parents be better parents.

My impression is that you don’t teach parenting from a guidebook.  Teaching parenting is a messy process that requires personal attention and getting involved in people’s lives.  Lowering class size is easy.  Working day-in, day-out alongside a new mother to help her parent better than her parents is hard.  This is all necessarily hard for the government to do well.  We all should think hard about how we can help others parent well.

I think our own president is an example of good parenting in less-than-optimal circumstances.  They were not rich, but his mother and grandparents cared deeply about his character and education.  Do you remember this ad from the campaign?:

Candidate Obama: “She’d wake me up at four thirty in the morning and we’d sit there and go through my lessons and I used to complain and grumble and she’d say well this is no picknick for me either Buster.”

Voice-over: His life was shaped by the values he learned as a boy. Hard work, honesty, self-reliance, respect for other people, kindness, faith.

More Thoughts on Grad School

Hear This

If you are thinking about grad school, you should listen to this radio conversation with Penelope Trunk just to be sure.  Also read my comments earlier on doing a PhD.  It wouldn’t hurt to read this, this, this, and this.  It’s not my place to tell people they shouldn’t go to grad school, but I do think most need to hear “the rest of the story.”  At minimum you should really know why you are going after that masters, PhD, MBA, law, or medical degree.

“But It Worked for Me”

In the interview, a caller would often say “Well I got this degree and wouldn’t be in the great position I am now otherwise.”  This supposedly refutes the argument that grad school is a bad choice in many/most cases.  Let me explain why it is poor logic.

First, there are cases where grad school is a requirement to work in a field.  Yet, there are plenty of fields where grad school is far from necessary to be successful (e.g. writing, business).  In these fields, especially, we must ask “What does the counter-factual look like?”

Considering the counter-factual let’s us compare how successful a given person would have been in the world where 1) they did go to grad school, or 2) they didn’t.  Talented writers don’t need to sit in classes that teach them to write creatively.  A sharp business mind might be better off getting experience rather than book smarts.  It is very likely many people would do just as well without a grad degree and not have to take on debt.  Saying “It worked for me” does not prove grad school was necessary.  Many might have been just as successful or unsuccessful on their own.

I once had a boss who said “A turkey with a PhD is still a turkey.”  If you can’t make it in the business world without an MBA, you won’t make it with one.  If you can’t get a publisher for your novel without an expensive creative writing degree, the degree is not going to make a difference.

Grad School as An All-Pay Auction

There is a type of auction where all bidders pay their bid, but only the highest bidder gets the auctioned item.  Grad school is perhaps a little like this: only the top of the talent distribution is going to be highly successful.  Very few writers will have a bestseller.  Less than 1% of MBAs will become CEOs.  Think of this as “winning” the auction.

The thing is, everyone that goes to grad school pays – usually by taking on debt and certainly by spending time.  All grad students pay yet only a few “win.”  But who wins?

Some will say luck determines who gets to the top.  In that case, grad school is an all-pay auction in which a winner is randomly chosen among those who bid (i.e. went to grad school).  This assumes everyone has an equal, if small, chance of winning.  You get this chance by going to grad school

Yet, another possibility is that the talented going into grad school will be the talented leaving grad school (And the untalented will remain untalented).  This is the “Turkey hypothesis” stated above.  In this case, grad school is costly, but the naturally talented will “win” no matter what.

I think each story has some truth to it.  And, the network effects can be large at very elite schools.  But, 95% of grad schools don’t fit into that category.

Think carefully through these issues before going to grad school.  The marketing lines from many schools don’t tell you that you are first and foremost a revenue stream.  Make sure you know what you are getting out of it before signing up.

My Friday morning post on how awful agricultural subsidies are is here in case you missed it.

The Presidential Politics of Ag Subsidies

Presidential Posturing

I’ve occasionally said the U.S. Senate consists of 100 people each convinced they should be president.  Consequently, your typical Senator doesn’t want to ever inhibit any future presidential prospects he or she might have.

Due to the quirky presidential primary system, voters in early states matter a lot.  This paper finds that a voter in an early state has five times more influence than a voter in a late state on who gets the nomination.  That means if you want to be president you need to make voters in Iowa and New Hampshire very happy.

It turns out an effective way of making some one happy is to give them gobs of money.  Since bribes are illegal, congressmen regularly appropriate about $20 billion per year for agricultural subsidies.  Corn farmers receive the largest portion of this money, and guess which state grows the most corn:  Iowa!  Iowa is one of if not the biggest recipients of farm subsidies in the U.S.  Senators are making sure Iowans are happy in case they ever need those valuable primary votes.

Agricultural Subsidies

Euphemistically called things like “commodity stabilizers,” agricultural subsidies are at their core payments from the government to farmers to supplement their income.  This transfer of funds from taxpayers to farmers has the effect of driving down the price of commodities, such as corn.

While lower prices may appear to be a good thing, artificially low commodity prices can have quite perverse effects.  In fact, agricultural subsidies work to undermine several other efforts of the Federal government.  Below I explain how these programs keep developing-world farmers in poverty and potentially increase the obesity “epidemic” in the US.

The Government Fights Itself

Lowering the price of US farm products will lower the world prices of such products.  This means that farmers in developing countries will either earn less for their products or will be driven out of business if they cannot compete with their subsidized counterparts.  This study estimates that US could increase Third World farmers’ incomes by around $7 billion each year by stopping farm subsidies.  It is ironic, then , that the US spends billions on development aid to reduce worldwide poverty yet does so much to increase worldwide poverty through farm subsidies.

A second perverse impact of agricultural subsidies is that it lowers the price of unhealthy foods.  For example, high fructose corn (HFC) syrup is artificially cheap because corn is artificially cheap.  Food makers thus use HFC in many food items we say Americans should be eating less of.  By lowering the cost of unhealthy foods, farm subsidies may contribute to Americans’ overindulgence (though admittedly this has been hard to show empirically.)

Again, though, the government is fighting itself.  The government supposedly wants to discourage unhealthy living because the government will pay much of the tab for American obesity and its co-morbidities.  Perhaps Mrs. Obama could be more effective if she spent less time getting kids to “move” and more time lobbying her husband to veto all farm subsidies.  That would be a great way to fight obesity and poverty.

Solutions

Let’s summarize:  the Federal government transfers billions of tax dollars to a very small segment of Americans.  This transfer then increases Third World poverty, undoes some positive effects of development aid, and potentially encourages Americans to eat unhealthy food which will then increase Medicare costs that are already set to bankrupt us.  It is a remarkably efficient way to screw things up.

Like many of Washington’s spending problems, the root issue lies in the nature of the incentives.  Electing a new crew of politicians is unlikely to change much.  I wish reform-minded activists would spend more time trying to change the incentives rather than the people.

In this case, I think we should randomize which states are “early” primary states.  One year prior to the election year, states could be randomly assigned to one of five primary dates each separated by two weeks.  Ten states would hold primaries on each date.  Since the early states would change each election, we could avoid excessive doting over special voters.

Photo: http://www.getmoneyenergy.com/2009/06/economy-watching-food-inc-movie-food-industry-practices/

What If You Could Pay for a Job Interview?

Have you ever seen a job posting that you know you’re a perfect fit for?  If you don’t have a contact in the organization, it can be depressing.

You know you are a good fit but how can you credibly convey this information to the company?  After all, a typical job posting might generate hundreds of applicants all claiming (and lying) that they are a perfect fit.  You are just one needle in the haystack.

This is also a problem for firms.  Firms want to find good fits.  Unfortunately, “good fit” does not always mean the person with the best GPA or alma mater.  Many companies are flooded with applications from people who look good but really don’t want the job.  For example, a good fit may be someone with a below-average GPA, but who really wants to work in in the area and is therefore more likely to stay with the company.  It’s quite hard to tell if an applicant sees a position as a back-up or their top choice.  There is an “information asymmetry” where the applicant knows much better than the firm how qualified and interested he or she is in the job.

This matching problem is frustrating and costly for both job seekers and firms.  Firms must use expensive software to weed through hundreds of resumes.  It is guaranteed these programs miss great candidates who didn’t use the right buzz-words.  Firms interview un-serious candidates and no doubt hire the wrong people often.  Job seekers waste time applying for tons of jobs they don’t really want or are marginally qualified for.  It is one big, uncoordinated mess.

A Simple Solution

There is a simple solution to this mess:  firms should ask applicants to make a donation in any amount they like when they apply for a job.  The donations would go to one of several pre-selected charities so that the applicants aren’t paying the firm for an interview and firms aren’t trying to earn money by posting fake ads.  I’d suggest an “honest broker” website could manage these donations and charge a fee to companies posting jobs.

Job seekers would know the company is serious about hiring someone because the firm paid a sizable fee to post the ad.  Firms could spend less on HR labor and software to cull through numerous applications, but they would also have an incentive to write informative ads which will increase the probability of attracting the right type of candidates.

I would also suggest applicants be able to see what others pay so that they can decide how much they want to spend (just like eBay).  This mechanism would offer a credible way for applicants to tell companies how interested they are in a position.  Instead of spending days sending out tons of resumes, job seekers might find 5 perfect positions and allocate $500 for these applications.  Applicants could tailor-make their materials for each of those five companies.

This arrangement would greatly simplify the situation.  Fimrs could see which applicants put their money where their mouth is.  Knowing these candidates are serious, they would be willing to invest substantial time interviewing the top 3 or 5 bidders to understand why the applicant believes he or she is such a good fit.  By making better hires, firms would suffer less costs from turnover and there might be less frictional unemployment.

Of course, you might think this discriminates against applicants who cannot pay.  While a rich applicant could pay top dollar for all postings, that person can still only take one job.  If the firms consider several applicants closely, this will still give others a shot.  Furthermore, I can imagine colleges offering low-interest loans to help needy students participate in this market effectively.

Also, you should read my earlier post today on why crime is bad economically.