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Research Continues on the Stupidity Rays Emanating from the American Enterprise Institute...

Only Shrillblog can deal properly with American Enterprise Institute economist Kevin Hassett's declaration that the Russian economy is outperforming America's--because, you see, dictatorships like Vladimir Putin's "are not hamstrung by the preferences of voters for, say, a pervasive welfare state."

Research continues on just what kind of rays emanate from 1150 17th Street that make dumb people dumber, and smart people dumb. The latest volunteers were the brilliant Kevin Murphy and Gary Becker, who were strapped into a test capsule that was sent in a close flyby by the AEI. This is what emerged:

The Upside of Income Inequality: This brings us to our punch line. Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavorable development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applica­ble to human capital as well as to physical capital. The initial impact of higher returns to human capital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to investments in education and other human capital...

In their normal state, Kevin and Gary would say that there are two possible causes of rapid growth in skills and education premiums: demand and supply. If it is demand--if technological progress accelerates so that it outstrips the previously-expected growth path, and if education and skills are strongly complementary with technology (as we believe them to be), the education and skills premiums would increase as the productivity of the American economy grew rapidly. This would be good news.

If it is supply--if for some reason the share of Americans receiving educations and gaining skills falls below previously-expected trends, and no longer keeps pace with the normal advance of technology, then the education and skills premiums would increase as the productivity of the American economy grew less rapidly than had been expected. This would be bad news.

We can, Murphy and Becker would say, tell the difference. If the rise in inequality over the past generation is due to good news, we would expect the share of Americans going to college to advance faster than previous historical trends and we would expect overall economy-wide productivity growth over the past generation to have been faster than usual. If the rise in inequality over the past generation is due to bad news, we would expect the share of Americans going to college to fall short of normal trends, and we would expect economy-wide productivity growth to have been slower than normal.

And guess what? over the past generation--even taking into account the very good decade since 1996--productivity growth has been slow, and the share of Americans going to college has not risen rapidly. On the quantity-of-education side, the news is not good:

[W]hy haven’t more high school graduates gone on to a college education when the benefits are so apparent? Why don’t more of those who go to college finish a four-year degree? (Only about half do so.) And why has the proportion of American youth who drop out of high school, especially African-American and Hispanic males, remained fairly constant? The answers to these and related questions lie partly in the breakdown of the American family, and the resulting low skill levels acquired by many children in elementary and secondary school—-particularly individuals from broken households.... Most high school dropouts certainly appear to be seriously deficient in the noncognitive skills that would enable them to take advantage of the higher rates of return to education and other human capital...

And yet this passage is followed by the conclusion:

For many, the solution to an increase in inequality is to make the tax structure more progressive—-raise taxes on high-income households and reduce taxes on low-income households.... A more sensible policy is to... encourage more human capital investment. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by dis­couraging investments in its most productive and precious form of capital—-human capital.

Becker and Murphy thus argue, in the space of three paragraphs, that (a) increases in the net return to education caused by spreading inequality generated by rising pretax wage differentials won't lead to increases in educational attainment, but (b) decreases in the net return to education caused by reducing inequality through progressive taxation will lead to decreases in educational attainment.

All are urged to remain far from 1150 17th Street until the mechanism of these effects is better understood.