New Freakonomics Podcast: Does College Still Matter? And Other FREAK-y Questions Answered

Freakonomics Radio

“Does College Still Matter? And Other Freaky Questions Answered”: In our second round of FREAK-quently Asked Questions, Steve Levitt answers some queries from listeners and readers.

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Our latest podcast is another attempt (here’s the first) to answer some of the questions you’ve asked us on the blog. (You can download/subscribe at iTunes, get the RSS feed, listen live via the link in box at right, or read the transcript here.) Here’s how it begins:

 

DUBNER: A reader named Jonathan Bennett asks, “Is it true that college education is no longer a factor, or [is] even a disadvantage, when it comes to employment?” Levitt, what say you?

LEVITT: [laughs] I think that never has anyone made a statement more false than Jonathan Bennett’s statement that education would be no help or a disadvantage in the modern economy. Of all the topics that economists have studied, I would say one we are most certain about are the returns to education. And the numbers that people have come up with over and over are that every extra year of education that you get will translate into an 8 percent increase in earnings over your lifetime. So someone who graduated from college will earn about 30 percent more on average than someone who only graduated from high school. And if anything, the returns to education have gotten larger over time. They’re as big as they have ever been.

Measuring something like gains to education is necessarily tricky: how do you sort out the effect of education itself when the college-going population is likely very different from the non-college-going population? To that end, Levitt describes a clever study that found a way to isolate the impact of education:

LEVITT: So back in Vietnam, men were entered into this draft lottery.  And if you got a very low number, it meant you were likely to go to Vietnam.  If you got a very high number, it meant you were safe. There was a way, however, to avoid service, which was to go to college.  So what happened was, the men who were unlucky and got bad draft numbers, many more of them went to college than did the people who got high draft numbers.  Now they wouldn’t have gone to college otherwise.  They went only to avoid going to Vietnam.  So what the economists have done is they’ve compared the people who got kind of medium draft numbers.  So they weren’t sure if they’d be drafted or not, but in the end they ended up not being drafted.  But many of those men still went to college.  And they compared that group of people, who were identical in principle to the people who were lucky and got really high draft numbers.   And those high-draft-number people — they didn’t have to go to college to avoid Vietnam.  So many fewer went to college.  And consequently, if you follow them through their lives — the people with the medium draft numbers, who didn’t go to Vietnam, but many more went to college — and you compare them to the people with the high draft numbers, who neither went to Vietnam nor went to college, and you see returns to education.

Another reader wanted to know Levitt’s view of healthcare reform:

LEVITT: Well, my friends in the Obama Administration aren’t going to be very happy with me, but I really, I don’t think it solved any of the important problems that we’re facing with healthcare.  So virtually every economist will tell you that there were two things you needed to do to healthcare reform to materially improve the situation.  The first was to break the link between the provision of healthcare and employment.  And that is just an archaic element of our healthcare system, which really makes no sense.  And yet because of tax subsidies, it’s the way most people get their healthcare — through their employer.  It shouldn’t be.  There’s no good economic justification for it.  And yet, if anything, I think this healthcare reform bill actually strengthened that link.  … [Healthcare] is virtually the only part of the economy where I can go out and get any service I want—cancer treatment, open heart surgery, have a wart removed, whatever it is—and I pay $3 for it or $5 for it or nothing, even if it costs $50,000 or $100,000.  I mean, imagine if you had the same situation with automobiles.  Where I could show up at the car dealership and I could say, ‘I want the Mercedes for free.’  Well, people say, ‘You can’t have the Mercedes for free.  You have to pay $50,000 for it.’  You say, ‘Why not, I have an inalienable right to free healthcare.  Right?  Why don’t I have an inalienable right to a free Mercedes?’

Note to Levitt: I don’t think your friends in the Obama Administration are the only ones who won’t like your views. Smiley face.

Finally, Levitt also addresses a listener’s question about how recent drug busts in the slums of Rio de Janeiro will affect crime there. For his take on that — you may be surprised — check out the podcast. Thanks, as always, for your questions. They were excellent, and we’ll keep answering them in future podcasts.

Audio Transcript

Does College Still Matter and Other Freaky Questions Answered

 

Stephen J. DUBNER: What kind of questions do you think we're gonna get here?  Do you think they'll be like life advice, stock advice, or more like you know, boxers-or-briefs kind of questions?

Steven D. LEVITT: Ummm...

ANNOUNCER: Freak-quently Asked Questions from Freakonomics Radio.  Here’s your host, Stephen Dubner.

DUBNER: So, you know, I'm just a writer and a radio host.  But my Freakonomics friend and co-author, Steven Levitt, he's a genuine PhD-holding research economist at the University of Chicago.  So once in a while, I like to drag him in front of my microphone to field some questions from you, our listeners and from readers of the Freakonomics blog.  We call it Freak-quently Asked Questions.  In our previous installment, Levitt talked about, among other things, the value of voting.  The economist's take?  Voting just isn't a rational way to spend your time and  energy.  Not surprisingly, quite a few of you objected pretty strenuously to Levitt's message.  I'm guessing today's program will upset just as many of you, if not more.  If I had to predict which answer is mostly likely to set you off--predicting the future by the way is impossible, but we human beings can't help ourselves.  That's actually the theme of an upcoming radio hour we're making now.  But anyway, if I had to predict which answer from today's episode is most provocative, I'd say it's when Levitt assesses the recent healthcare reform bill.  He also talks about whether college education is as valuable as it's made out to be.  And does increased policing in Brazilian slums actually help stop crime?  We sat down together in my office a couple of weeks ago.  Uh, Levitt, how do you feel about this prospect today?

LEVITT: Never been more ready!

DUBNER: Mmm, I like the confidence.  Confidence bordering on cocky.

LEVITT: You know me.

DUBNER: Alright, we’ll begin.  Levitt, here’s a question for you.  Something I’ve heard you talk about a lot.  Interestingly.  You’ve done some research yourself on gains to education.  So a reader named Jonathan Bennett asks, “Is college education no longer a factor, or even a disadvantage when it comes to employment?”  Levitt, what say you?

LEVITT: I think that never has anyone made a statement more false than Jonathan Bennett’s statement, uh, that education would be no help or a disadvantage in the modern economy.  So of all the topics that economists have studied, I would say one we are most certain about are the returns to education.  And the numbers that people have come up with over and over are that every extra year of education that you get will translate into an 8% increase in earnings over your lifetime.  So someone who graduated from college will earn about 30% more on average than someone who only graduated from high school.  And if anything, the returns to education have gotten larger over time.  They’re as big as they have ever been.  And I think it makes sense that the returns to education now are higher than they’ve ever been because of how the economy has changed.  It used to be that with a low education, you could get a good manufacturing job, lifetime employment.  But now with the Chinese competition for instance, almost all the manufacturing jobs are gone, because there are Chinese workers willing to work, who are able to do these jobs at wages that are one-fifth or one-tenth of what an American worker would demand to do it.  So, I tell you, I was in a taxicab a couple days ago, and this is a story that really exemplifies how the economy is changing.  Over the two-way radio, the dispatcher’s voice comes, and he says, “Gentlemen, I’m looking for someone to pick up one extra shift on the night shift, a new taxicab driver.  If you know someone, they need to have experience.  And I also need a college education.”  And I thought to myself, “If you need a college education to drive a cab in this country, what job don’t you need to have a college education for?”

DUBNER: Well let me ask you this.  How does an economist or anyone go about measuring—so the gains to education that you talked about.  When you talk about a relationship between an extra year of college, or graduating from college and future income, how do you know that you’re not just measuring that people who go to college are more motivated, smarter to start with, and how do you tease that out in the data?

LEVITT: Yeah, that’s a great question.  Because so much of what we do in Freakonomics, SuperFreakonomics, is all about distinguishing correlation from causality.  And what you worry about is the people who would have earned money already are the ones who get more education.  So the trick is finding what I would call an accidental experiment.  So what you need is a way in which two seemingly identical people, because of some quirk of nature or fate, one ends up getting much more education than the other.  So maybe the best example, though somewhat of an old one, comes from the Vietnam draft lottery.  So back in Vietnam, men were entered into this draft lottery.  And if you got a very low number, it meant you were likely to go to Vietnam.  If you got a very high number, it meant you were safe. There was a way however to avoid service, which was to go to college.  So what happened was, the men who were unlucky and got bad draft numbers, many more of them went to college than did the people who got high draft numbers.  Now they wouldn’t have gone to college otherwise.  They went only to avoid going to Vietnam.  So what the economists have done is they’ve compared the people who got kind of medium draft numbers.  So they weren’t sure if they’d be drafted or not, but in the end they ended up not being drafted.  But many of those men still went to college.  And they compared that group of people, who were identical in principle to the people who were lucky and got really high draft numbers.   And those high draft number people, they didn’t have to go to college to avoid Vietnam, so many fewer went to college.  And consequently, if you follow them through their lives, the people with the medium draft numbers, who didn’t go to Vietnam, but many more went to college, and you compare them to the people with the high draft numbers, who neither went to Vietnam nor went to college, and you see returns to education of those kinds of numbers I mentioned before.  About a 30% increase in earnings, by virtue of going to college versus stopping at high school.

DUBNER: So that’s pretty fascinating.  But also what’s interesting to me is that for these guys who got a really bad Vietnam draft number, that actually turned out to be a really good thing for the outcome of their lives, in that a lot of them went to college who might not otherwise have, and therefore resulted in a—I mean, it’s a very strange, unintended consequence of the Vietnam War draft, yeah?

LEVITT: That’s right.  They earned a lot more money.  Now, economists don’t always want to say just because you have more money, you had a better life.  Now these guys had to suffer through college.  These were guys who didn’t want to be in college, and maybe, just possibly, they would have been happier living a life where they earned less money and had those four years to go ride around, you know do hippie stuff or something like that.  So who knows if they’re really better off?   They certainly earned more money.

DUBNER: Coming up, Levitt shares his opinion on healthcare reform.  And it will not make his friends in the Obama administration very happy.  Also, a look at Brazilian policing.

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ANNOUNCER: From WNYC and APM, American Public Media, this is Freakonomics Radio.  Here's your host Stephen Dubner.

DUBNER: Let me, let me play you another one here.

LISTENER: Hi, my name is Tabby Lei.  I'm from Denver, Colorado.  I have a question for you.  What do you think of the healthcare reform passed in 2010?  Thank you.

LEVITT: Well, my friends in the Obama administration aren’t going to be very happy with me, but I really, I don’t think it solved any of the important problems that we’re facing with healthcare.  So virtually every economist will tell you that there were two things you needed to do to healthcare reform to materially improve the situation.  The first was to break the link between the provision of healthcare and employment.  And that is just an archaic element of our healthcare system, which really makes no sense, and yet because of tax subsidies, it’s the way most people get their healthcare, is through their employer.  It shouldn’t be.  There’s no good economic justification for it.  And yet, if anything, I think this healthcare reform bill actually strengthened that link.  So I think that’s very disappointing to economists in that regard.

DUBNER: Just explain why that’s a bad idea.

LEVITT: So people say, “Why doesn’t it  make sense to have healthcare tied to employment?”  Well, I think  I actually want to turn the question around and say, “Why in the world, if you’re starting from scratch, would you link it to employment?”  I think there’s no good reason.  I mean, for one thing, many people don’t work.  And so you’re left with this situation where there are people who work who get healthcare through their employer.  And there are people who don’t work, and they don’t have an employer, and so you have to have these dual systems.  There’s no intrinsic reason why your employer should provide your healthcare, other than the fact that we started doing it a long time ago and there are enormous tax subsidies to doing so.  It leads to what’s called job lock.  It’s difficult to change jobs.  And it leads to circumstances where we have to have these overlapping systems which are inefficient.  Why is your auto insurance not tied to your employer?  I mean, no one in their right mind would say, “Well, my automobile insurance should be tied to my employer.”  Well then, why would my healthcare insurance be tied to my employer?  It’s just, there’s no fundamental reason why it should be that way.

DUBNER: And what does it do to employers to make them have to be the people who dish out healthcare?  In other words, there are all these large firms that are supposed to be good at one thing.  Making software, making cars, or whatever.  But then also they need to devote an increasingly large share of their resources and their bandwidth to running an insurance program for their employees as well.

LEVITT: I think that’s exactly right.  That you would think that if you had firms whose specific jobs were to provide healthcare insurance, that they’d be better at it than having Frito-Lay or GM or whoever it is.  I mean, they’re good at making chips, and they’re good at making cars, but why should they be good at making healthcare?

DUBNER: So that’s one piece of why you didn’t like the healthcare reform.  Because it did nothing to weaken the link between employment and healthcare.  What’s the other reason?

LEVITT: An even bigger problem with healthcare today, which was not addressed at all in the reform bill, is that people aren’t paying for the services they get.  It’s virtually the only part of the economy where I can go out and get any service I want—cancer treatment, open heart surgery, have a wart removed, whatever it is—and I pay $3 for it or $5 for it or nothing, even if it costs $50,000, $100,000.  I mean, imagine if you had the same situation with automobiles.  Where I could show up at the car dealership and I could say, “I want the Mercedes for free.”  Well, people say, “You can’t have the Mercedes for free.  You have to pay $50,000 for it.”  You say, “Why not, I have an inalienable right to free healthcare.  Right?  Why don’t I have an inalienable right to a free Mercedes?”  And to me it just makes no sense.  That healthcare is just like any other good in the economy.  And because we aren’t charging people for it, what it costs to produce, people are inefficiently consuming it.  They’re making the wrong choices.  And you can tolerate that if it were a small part of the economy.  But now that healthcare is 15%, 20% of GDP, we have to start treating it like what it is, which is another good.  Now people hate to talk about this trade-off between health and life and money.  But the fact is that, if not today but sometime in the not-too-distant future, we’re going to have to make trade-offs, such as my grandmother is in a vegetative state, being kept alive by machines pumping her heart, and instead of the state paying for that, they’re gonna say, “Well, look.  You gotta pay for some of this.  You can either take the $150,000.  We’ll keep your grandmother alive.   And use it for that.  Or you can put your kids through college.  Your choice.”  And people are going to have to start making those tough choices.  And they won’t be pretty. And they won’t be fun or happy.  But it is just—you know, economics is the study of scarcity.  And in a world where healthcare becomes more and more costly, the scarcity is going to be more and more binding.  We’re going to have to make those tough choices that are imbued with this moral element.  But nonetheless, it’s an economic choice when you get down to it.

LISTENER: Hi, this is Ricardo Castro calling from São Paulo in Brazil.  At the end of 2010, Brazilian army and the Brazilian police went out into the slums to fight drug dealers.  They took a lot of weapons and drugs from them.  Some say they lost millions of dollars over a period of two days.  And what happens?  Should we expect crime to decrease because of all the police repression?  Or should we expect crime to actually increase, because drug lords are trying to refinance--robberies, a lot of crimes?

DUBNER: Best regards, Ricardo.  What do you say?

LEVITT: Actually, Ricardo, I think neither or your predictions will come true.  I think a third prediction will come true.  My perspective is that the drug dealers who are selling drugs in these favelas have a tremendous incentive to keep those areas safe.  Nobody wants to go buy drugs in a place where people are getting shot, or where they’re afraid of getting mugged.  And so far more than the police, who don’t really have that strong an incentive when you think about it to keep crime low, the drug dealers need law and order.  And so I actually think two things will happen when you crack down on the drug dealers.  Well, really three things.  First, sure, you make it a lot harder on the drug dealers to sell drugs.  So you will have that effect of reducing the number drugs that are sold.  My guess is, though, if you go back to these neighborhoods, you will find that the amount of crime will have gone up dramatically after the police come to them than before.  And that’s both because the drug dealers will no longer have the incentive to keep things clean and safe and protect the buyers, because they’ll no longer be selling the drugs there.  Number two, the violence that surrounds drug dealing is all about the property rights.  It’s about the drug dealers fighting with other drug dealers to find a place where they can sell their drugs.  If you make it impossible for these drug dealers to sell drugs in the favelas they’ve already established in, then they’re going to go find some other place to try to sell drugs, and that’s going to lead to conflict between gangs.  And I think there’ll actually be a spike of violence as they sort out trying to figure out who’s going to have the rights to sell drugs in the new place that they’re selling drugs in.  So I think in the short run definitely you’re going to see more crime rather than less crime associated with the police coming into these areas.  Even more so, because these are, remember are Brazilian police and Brazilian police are not well-known for their honesty and dedication to duty.  In fact, I wouldn’t be surprised based on what I know in talking to people who have studied Brazilian police, that indeed many of these police officers who are now guardians of favelas are quite familiar with these areas, because the standard job of many Brazilian police officers when they’re off duty is to work for the drug dealers in the favelas, serving as security guards.

DUBNER: That does it!  Our second installment of Freak-quently Asked Questions.  We'll probably do another one sometime.  Thanks to everyone who sent in questions, and sorry we could only get to a few of them.  Freakonomics Radio is a co-production of WNYC, American Public Media, and Dubner Productions.  Subscribe to this podcast on iTunes and you'll get the next episode in your sleep.  You can find more audio at FreakonomicsRadio.com, and as always, if you want to read more about the hidden side of everything, please visit our new, improved blog at Freakonomics.com.

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  1. Dave Auerbach says:

    Currently, approximately 48% of health care insurance is employment based. Almost of all of the rest is about equal amounts medicaid, medicare, and uninsured. Just a little history about the link between health care insurance and employment. At the end of WWII the government mandated wage freezes to reign in inflation caused by the scarcity of employees and increasing wages. Employers then attempted ways to raise total compensation. One way was adding health insurance. A 1954 IRS ruled that health care was not taxable. It was, and continues to be a way to increase total compensation without increasing wages. Unfortunately, the explosion of health care costs has resulted in relative diminished W-2 wages and increasing employee benefit from employer based insurance.

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  2. Dave Auerbach says:

    And Dr. Levitt correctly points out the main problem in our current health care system, that of moral hazard. Many of the insured do pay next to nothing for the care provided, causing massive overultilization. A high deductible health care plan with an associated health savings account (hsa) is encouraged in Obamacare, and is a step in the right direction.

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    • Chris Sampson says:

      I live in the UK. Health care is free. Moral hazard is not a problem. The reason moral hazard is not a problem is because people do not demand health care. They demand health. People do not like health care, it is usually unpleasant. Moral hazard therefore rarely exists in health care markets. Over-utilisation in the US is physician-led (because there is money to be made), not consumer-led.

      Well-loved. Like or Dislike: Thumb up 5 Thumb down 0
      • Chad says:

        I also question the issue of moral hazard. There are certainly some public goods that we cannot be expected to pay for every time we use.

        Call the police because someone is robbing your house? That will be a $500 deductible!

        Enroll your child in public school? $2000 please!

        I do not see any problem with considering basic health care a public good that should be free of charge. Sure, plenty of procedures are luxuries and should be paid by the patient. Most of these aren’t covered by insurance right now anyway. I even think that experimental procedures should not be covered until they are tested and proven to work. Still, making an analogy between a Mercedes (or any car for that matter) which is a luxury and medical procedures that keep people alive and well is like comparing filet mignon and wine with bread and water.

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  3. Don'tCallMeDoctor says:

    In regard to your answer to Jonathan Bennett’s question, how applicable is data from 50 years ago to today? America has changed in profound ways since the men in that study made their decisions.

    Talk of a “higher education bubble” is now on the national radar; investing in a pre-bubble education seems like a terrible idea. I really wish Steve would have treated the question more seriously.

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  4. mhenner says:

    I thought the segment on college only dealt with benefits, but didn’t discuss costs.

    What if, instead of going to college for 4 years, a young person worked for that period of time, and paid all earnings for that period into a mutual fund account. These are earnings which would not have been received if a full time student. Then added to that the amount that would have been spent on tuition/books/etc.

    Yes, the earnings of a college graduate are greater, but could the compounding of earnings of these initial, early investments actually exceed the value of the higher wages of college grads?

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  5. Enter your name says:

    The college study described tells us whether it was worth going to college 50 years ago. It doesn’t really tell us anything about whether it’s worth going to college today.

    Additionally, I’m not sure that it tells us as much as it claims about the inherent differences between college and non-college bound men. A mid-number draftee who went to college might have been more risk averse than a low-number draftee who also went to college.

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    • Summer says:

      My thoughts exactly. We all know that it WAS beneficial to get a degree, but now??? I was very disappointed by the “study”.

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  6. Michael Parks says:

    I wanted to read the Vietnam paper, but $5 is pretty harsh for a paper that may be educational, or may be a waste of an hour.

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  7. Chris Sampson says:

    I lost a lot of faith in Levitt after listening to this podcast. He clings to his free market economic ideals far too religiously… quite irrationally. Health care is certainly nothing like a normal good, and I’m shocked that he thinks this (surely he has read Kenneth Arrow’s 1963 paper?).

    I’m astonished that he hasn’t realised that the USA, with one of the biggest privately-funded health care systems in the world, is also one of the most inefficient. His suggestion that health care should have a marginal cost that is not zero has no grounding in reality.

    Get with the times, Steve.

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    • Dave Auerbach says:

      Although I have not at all lost faith in Levitt, I do agree with much that Sampson says. The current health care system is wildly inefficient. It is being gamed, and huge amounts of money claimed by hospitals, insurance companies, pharmaceutical companies, and medical suppliers. The physician and the patient are relatively loss in this battle. Sadly, I have no idea how to cure this. Socialization of medicine is not the answer, but I do not know what is.

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  8. Tom Maguire says:

    Colleges With The Lowest Return On Investment

    http://huff.to/hEYXVn

    Sortable list that includes four year tuition costs for (I think) every school in the country.

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