More Reading Recommendations from David Romer
DeLong Smackdown Watch: Dani Rodrik

Take Education as the Key Link!

Tyler Cowen accuses me of being "too quick" to resort to the Marshallian scissors in defending Goldin-Katz "inequality the result of too few people going to college" against Becker-Murphy "inequality the result of wonderful technological progress." How can an economist be too quick to resort to the Marshallian scissors--i.e., supply and demand? As J.R. MacCulloch said in the early 19th century:

It is very simple to turn a parrot into a tolerable political economist. All you must do is to teach it to say, "Supply and demand! Supply and demand!"

Apparently, "Pieces of eight!" and "Yo, ho, ho, and a bottle of rum!" are optional.

Here's Tyler:

Marginal Revolution: Education as the critical problem behind current inequality: Here is an excerpt from my New York Times column today:

The return for a college education, in percentage terms, is now about what it was in America’s Gilded Age in the late 19th century; this drives the current scramble to get into top colleges and universities.  In contrast, from 1915 to 1950, the relative return for education fell, mostly because more new college graduates competed for a relatively few top jobs.... Goldin and Katz portray a kind of race. Improvements in technology have raised the gains for those with enough skills to handle complex jobs.  The resulting inequalities are bid back down only as more people receive more education and move up the wage ladder.

Income distribution thus depends on the balance between technological progress and access to college and postgraduate study. The problem... is that American lower education does not prepare enough people to receive gains from American higher education. Bottlenecks currently keep more individuals from improving their education...

Note that education is a fundamental issue behind the kinds of inequality we should worry about most, namely the failure of many poor people to do better over time.... In a dynamic era does educational access have much of a chance of keeping up with technological improvement?

The answer is "Yes." 1915-1950 was a time of extraordinary technological dynamism. And it does not seem to be the case that lousy public schools diminish the returns to higher education. Lousy schools lead people not to pursue further education, they don't seem to make further education unuseful. As Tyler says:

the data (see David Card's Econometrica 2001 piece, plus the work of James Heckman) still find relatively high returns to additional education...

And this seems to be as true for those who have no college as for those with some college and those with B.A. degrees: it seems that there is a 7% to 10% real return on investments in education, including as a cost of the investment the money you don't earn because you are in school rather than working, no matter how much education you have. (Some disciplinary Ph.D. programs excepted, of course.)

One additional point: the "current scramble to get into top colleges and universities" is the result of a large increase in the pool applying--300 million Americans rather than 200 million, plus a huge increase in foreigners who can afford American college--coupled with a failure of the "name" colleges to add slots for students. Demand for places at the top 50 name colleges has outrun supply, demand for places at colleges has not.

Clark Kerr saw this coming fifty years ago: that Berkeley-the-city was happy to benefit from surrounding Berkeley-the-university, but that Berkeley could not grow as fast as California would. Hence his attempt to make "University of California" the brand. To this day my stationery lists all the UC campuses: Berkeley, Davis, Irvine, Los Angeles, Merced, Riverside, San Francisco, San Diego, Santa Barbara, Santa Cruz, and, of course, Sunnydale[1]. (And we professors at the older campuses resist this common branding: we teach at "Cal" or "Berkeley" and our colleagues in Westwood teach at "UCLA" rather than at "UC.")

And with that, it's time for graduation.

[1] University of California at Sunnydale is, of course, a special case with a faculty and student body with some unique qualifications. It is the sibling school to the well-known Miskatonic University in Arkham, Massachusetts.