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.


BackOnEmployersHealthplan

I am guilty. After over 8 years of carrying my own health insurance, I finally jumped back on to my employer's plan.

Why now? My personal plan started at $170/mo. in 2002 (single male, non-smoker, age 40). Even though it was being paid after taxes, it was still within a few bucks of my cost for the plan at work, and it was a better plan. That was the pattern for 5 years or so, until I hit an age milestone and my rates jumped from $190 to $270+. By that time my employer had arranged for a much better deal on better coverage.

For the past two years I have eaten the extra $150/mo cost (excluding tax advantage), thinking for some reason that it was better for me to carry my own insurance. Silly boy. I sat down with the company accountant to discuss going back on, and he said I was a fool to NOT be on the company insurance, even though it will cost my employer over $300 (his share of the monthly rate). So, starting in June, I will be paying under $170 before taxes rather than over $350 after taxes.

I have to agree with Levitt - that's screwed up. Everybody should get the tax break on insurance premiums, or nobody should... There is no economic reason to give the employer the economic incentive.

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Danny

I think a good follow up question about the health care thing is what then as a society do we do with the less privileged individuals who end up needing catastrophic care? It makes many feel like good health then becomes a commodity of those who can afford it.

Dave Auerbach

The assumption is that health care makes a difference. It certainly does in specific instances--an individual with some types of cancer, most trauma cases, among others. However, studies have shown that increasing the amount spent on health care does not increase life span, or improve infant mortality. The current American health care system has enormous amounts of waste. I would consider much of the 14% insurance companies report as administrative expenses among this waste. Surely no one should die because of a lack of health insurance, and currently no one in need of medical care can be turned away for lack of money. So exactly who is currently suffering from lack of access to medical care?

Danny

well Dave, I think what you have to figure out is how to tell the country that if without insurance and someone gets cancer or has heart disease, how do they choose between 50,000 in treatment/operations or death?

Sure there's waste and there's unnecessary care going on in many instances, the fact is that people are drawn to the idea that survival from catastrophic illnesses simply depend on how well you save money for the case of emergencies.

The truth is that health care as an aspect of society has come a long way and can go even further. There has to be a method better than what we got. What I want to hear is what Levitt has to say about choosing between personal treatment and death. Because it's one thing in his example to say whether or not to spend the money on putting grandma in a situation to prolong her life. It's another to say, "this underprivileged person has stage 1 cancer of some sorts, and since the person can't afford it, it's going to develop into stage 4/5 and then death." That's a question that economists have to answer to the greater population in order for the argument to take strength.

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John

The remarks about the value of a college education are quite interesting. This is the first time I've every heard of anyone actually taking the question seriously and trying to disentangle causation from correlation.

Thanks for that, but I'm still very skeptical. A college education is extremely expensive, especially when once takes lost wages into account. It is also very difficult for anyone to reconcile something which is stated as a verified fact when it does not track with day to day experience.

How can it be true that a college education is a financially profitable endeavor when one, as I certainly am, is surrounded by un- or under-employed college grads on the one hand, and reasonably to very successful non-graduates.

Some possible reasons:

Bias defense: Having made very large investments in the degree people feel obligated to defend the sunk cost. Try asking an un-employed college grad about this and you'll usually hear a defense of the decision even though it has not worked out.

Changes in the population and business world since the 60s. Perhaps the value of a degree has declined as they have become more common?

Insufficient specificity: Perhaps some degrees are very profitable and the rest are not. I believe I read that the average salaries of college professors are inflated by a few very highly paid professors and researchers in medicine.

Another factor which may not be taken into account is that for many of us who have college degrees they are superfluous. How do they account for that in the statistics. I have a college degree, and I probably have slightly higher than average earnings compared to those who do not... but the two facts are, on another level, correlation not causation. My degree has nothing to do with my career and never has. As a matter of fact, I have discovered that most, perhaps all of my hiring managers were not aware that I had a degree. How common is that? Anecdotaly it is very common, but who can say.

I have not yet read the paper, mea culpa, but do these 8 percent and 30 percent numbers take into account the lost wages and costs of college? I know a young man who earned $0 before the age of 30. Call it 12 years of lost wages, interest on student debt, etc. Sure, he's now, at about age 35 or so making very good money indeed, but how long does it take someone to dig out from under that kind of deficit?

Last of all, there's the question of uncertainty. Even if college does average higher returns, that doesn't make it a good investment. Some of the winners are very big winners indeed, even within a certain field, how can one be sure to "win" that particular "lottery"?

In a nutshell, the cost of college is a certainty. The benefit, if not non-existent, is at least uncertain. If nothing else, that's not an obvious decision to make.

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caleb b

As my wife has a law degree from a good Midwestern school, so I know the following very well: A law degree is NOT worth the cost for the majority of students. Having a law degree was actually a detriment when she was trying to find a job. She wasn’t in the top 10 percent of her class so no law firm wanted to hire her, and any job that didn’t require a law degree wouldn’t hire her because she was “overqualified.”

John

Yes, a few years ago my wife and I were on our way to a movie, and stopped in to have dinner at a burrito place nearby. There we ran into the younger brother of one of her friends from high school. We chatted for a while and he told us how he'd finished his law program, passed the bar, and finally gotten a job in his field.

"But, " he said, "then I decided I really wanted to be able to afford a car, so I'm working here at night."

Jash

As far as college education is concerned, it really depends on your area. Mine is software engineering, and I realize that I actually probably use an year's worth of material for work. The other 3 years comprised of stuff that's under the hood, so to speak. Trouble is that not only is it unnecessary, it actually turned some people away into 'easier' majors. The analogy I like to use is that everyone needs to know how to drive. Only the enthusiastic want to know how the internal combustion engine works. Looking back, I'd rather have spent the 3 years actually working on projects and honing my skillset as a programmer, rather than knowing stuff I don't use, and hence won't remember.

While, I don't have any personal experience, I believe the same can be said about a lot of other majors. Marketing, advertising, business - these are things that come from experience, not from sitting in a classroom.

In short, college is not about learning stuff. In the age of the internet, learning is quick, easy and accessible. College is about skills, because they take time to develop, and you need constant feedback for improvement. And there are only so many skills you will need at your employment. For most majors, it can be done within 2 years instead of 4.

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Pramod

I couldn't agree more with you. I feel colleges should provide more flexible and customized programs based on the student's need.

Most colleges assume that all students wants to be a PhD in the major they've opted for instead of finding what every individual student wants to do.

Your experience reminds me of an article in Freakonomics last year comparing the education provided in a school/college to a public radio.

We need more Podcasts and less public radio!

john

OK, so I read the linked article. Unless I'm missing something it doesn't say what you imply it says. Fearing that I missed something I did searches in the paper for the words: pay,salary,compensation, money, dollar, etc.

The only substantial hit was this footnote:

"Angrist, Joshua D. and Alan B. Krueger. “Estimating the Payoff to Schooling Using the Vietnam-Era
Draft Lottery.” National Bureau of Economic Research Working Paper No. 4067. Cambridge, MA:
NBER, May 1992."

Perhaps you meant to reference that paper?

Kevin

I agree with the sentiment that the tax breaks should be given to everybody or nobody. There is no reason to justify subsidizing one buyer of health insurance over another. However, employers, particularly large companies, have more bargaining clout with insurers and can negotiate cheaper group rates. Do you think these economies of scale lend some justification to the employer-provided health insurance, at least at bigger companies?

Dave Auerbach

Kevin, your two comments are unrelated. The tax subsidy for health care is only available to employers. That is why so much health care is employer based. It has nothing to do with economies of scale. In fact, a full 60% of employer based health insurance is self-insurance by those companies themselves. The insurance companies only administer the plans, they do not provide the insurance.

Max

A large employer can negotiate group rates for health insurance, but so can other groups, like unions, alumni, and honor societies.

Insurance companies offer different insurance plans. Some plans just have fixed copays, but place a lot of restrictions. Other plans have fewer restrictions, but have 10-30% coinsurance, and higher premiums and deductibles. Having to pay 20% of the covered expenses and 100% of the non-covered expenses and deductible does encourage shopping around, but shopping around for healthcare is not like shopping around for a car.
First, you can usually see the car's price before you buy it, but you usually do NOT know the price of the test or treatment before you buy it. Just to find out the procedure code (CPT), you have to pay the AMA.
Second, it's a lot easier to choose a cheaper and less fancy car than to choose a cheaper and less effective treatment.

Julie

Regarding "free" health care vs a free Mercedes:

Before I start, a caveat: I'm Canadian and not completely familiar with the American system. That said, the number of stories I've heard about people bankrupting themselves or needing to take out second mortgages due to health reasons lead me to believe that health care in the U.S. is far from free. If you don't have insurance, as I believe many Americans don't, health care can be very, very expensive.

And even if health care *were* free, I don't see that as a bad thing. A Mercedes is a luxury; I think just about everyone can agree on that. If you don't have a Mercedes, you've still got plenty of options, chief among them being to drive a cheaper car. If you don't have your health, your options become far more constrained. Moreover, someone with a chronic or acute condition is not in the best bargaining position and could easily be exploited. I'm asthmatic. I don't want to walk into a hospital only to be told, "Sorry, we don't care that you can't breathe. Either pay us or get out." Ditto if I happen to break my arm. Or get hit by a car.

There are plenty of chronic conditions out there where cures are available but expensive for the individual who needs them, especially if that individual is unable to work, but could potentially work if they were getting treatment. It's a vicious cycle then, because without money, they can't afford treatment, and without treatment, they can't get money.

I will grant that there are plenty of elective medical procedures that should be up to the patient to pay for. Plastic surgery for cosmetic reasons. Liposuction. IVF fertilization for women over 40. And, similarly, there are cases where acute care may not be the answer, such as very elderly patients who may be better treated in palliative care than an ICU (so long as palliative care did not mean ceasing other medical options). These are discussions worth having.

But I think that everyone deserves to have basic access to medical care. I think the idea of leaving health care to only those who can afford it is barbaric in an industrialized country. Health is not a Mercedes.

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Dave Auerbach

Julie, you are correct in that, in an ideal society, everyone would have the health care that they need. The problem is, who is going to pay for it. Basically, everyone wants all the health care they desire for free. 50% of americans pay no income tax. What do you think they would say if I went up to them and said: "It is barbaric for you to be denied health care that you require. However, it is totally unreasonable for those who make more than you to pay for your care. Therefore, here is the deal. Pick a name from this list of the wealthy. In order to receive free health care you must provide 10 hours of service to them per week. Mow their lawn, watch their kids, wait for a couple of hours for them to get their tire changed, shovel their walk after it snows, whatever." For the life of me, I see nothing unreasonable about this. And yet I am sure that almost anyone being offered it would scream SLAVERY.

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Dave Auerbach

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.

Dave Auerbach

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.

Chris Sampson

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.

Chad

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.

Don'tCallMeDoctor

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.

mhenner

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?

Enter your name

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.

Summer

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

Michael Parks

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.

Chris Sampson

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.

Dave Auerbach

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.

Tom Maguire

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.

P.F. Bruns

I personally hold that health care is a fundamental human right, and that the Mercedes analogy is offensively specious.

Consider: If I cannot afford a $50,000 Mercedes--which is honestly an entry-level example at that marque once financing and options are factored in--I can get a $20,000 Toyota, a $5-10,000 used car, or a $3-500 bicycle. (I can get even cheaper options than that, but in those price brackets, the prices for maintenance outweigh the price break for entry.) Transportation options abound. If I need a $50,000 heart operation, my ability to shop around, especially without insurance, is limited severely. I can't just get a $300 bicycle.

So why is health care a fundamental human right? The UN has basically had to declare it such, because otherwise, we as a species have a disappointingly amoral tendency to let each other die if there's nothing in it for us. Economically, while I don't have metrics, I'd be willing to wager that longer-lived healthier people generate more demand for goods and services, create markets by making new things and inventing new services, and therefore benefit society at large.

The fact that it's just the right thing to do--to NOT ask "What's in it for me?" when a life is at stake, is not economically sound on its face, but longer healthier lives do benefit us all in the long run, I believe.

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Dave Auerbach

It is easy to say that healthcare is a right. Perhaps it is. But if it is then individuals have an absolute responsibility to maintain their highest health, meaning that no one can be allowed to smoke, overeat, not exercise, drink to excess, use drugs, and in many cases contract aids, among other things. In addition to our current progressive income tax structure, a significant excise tax must be imposed on those who, by their own actions, have potentially increased their health costs to society. If they are willing to pay to sin, then they are doing their fair share.

P.F. Bruns

The big economic reason to tie health insurance to employment--a practice with which I disagree overall--is that employers have a vested economic interest in keeping their employees healthy. A happy side effect for those employees fortunate enough to work for larger corporations is that those corporations' buying power helps force health insurance costs down. You or I cannot go to an insurer separate from our employers and get our employers' price breaks--nor can we get the government subsidies our employers get for paying our health insurance costs. (Well, at least not until the new health care laws kick in around 2014, if they do.)

However, for me, the practice of tying health insurance to employment is counterproductive because it has the potential to cause employers to make health a condition of employment. Now, for certain physical jobs, employers have a good point--it makes no sense to give roofing work to a person using a wheelchair to get around, for example, to pick a person with a severe heart condition to do heavy lifting, or to hire a blind person to drive a bus--but in general, it tends to marginalize those with disabilities or health problems. Worse, making employment a condition of health insurance tends to make health care harder to obtain for the unemployed, who often need it the most.

We need to make make health care easily affordable to all Americans regardless of employment status because healthier people buy more stuff. To do this, I believe we must:

1) Require health care providers disclose all prices up front. I want to know how much I will have to pay for any medications (right down to aspirin or antacids), my hospital stay, the procedure, everything. That way I can price-shop in non-emergency cases.

2) Raise taxes and cut other government costs. We're going to have to do that anyway, so we might as well do it to make it easier to provide health care.

3) Do everything economically feasible to lower health costs for consumers. The goal should be to commoditize health care, and make it as simple and as easy to get as buying a toaster.

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Dave Auerbach

Having all costs up front is an excellent idea. And the numbers given MUST be the amount each provider will accept as payment in full, not some specious "master charge" fee that no one expects to receive. This would provide for real competition.

In a somewhat similar vein, there should be different subsidies based on a number of factors. Highly efficient care should be fully subsidized, low efficiency health care have a much higher co pay. Individuals who have made life choices that have contributed to their illness (smoking, drinking, drug use, many cases of HIV, sedentary life style, over weight, etc.) should pay a much higher co-pay than those blameless.

Some type of socialized medicine would be acceptable it immediately allows an increase in physician income due to a decrease in overhead expenses such as billing, malpractice, federal regulation,etc. Allow physicians to practice medicine.

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Erin

Your answer on healthcare confuses me. How is it like a car? I caught an infection at a hospital a few years ago, went into toxic shock and ended up losing one of my legs. Must have cost hundreds of thousands to keep me alive. Very expensive and I would never be able to pay that back without bankrupting my family. Thank goodness for insurance. So what's the answer, let me die? Should medical research just stop because no one can actually afford the advancements that are keeping people alive? Probably you have an economic answer like your one about voting. But imagine your wife was dying in the hospital. Good idea to pullout of the ICU to stop from spending so much money. Or keep her alive to work (and pay taxes) and help raise your children.

Tev Kaber

I remember one job, I had the same job title as another guy who later became a friend. We compared salaries. I had a college degree, he did not. The difference in salary? I made $1/hour more.

A couple years later, we had jobs at different places, and he made much more than me. A couple years after that, we again switched jobs, now I was making more than him.

On getting hired, work experience carried much more weight than a college degree, and negotiation skills can make the difference on salary more that a college degree.

Currently I am at a Fortune 500 company, and while I do no directly hire people, I do read resumes, do interviews, and make a recommendation on who to hire. I do look to see where they went to school, but that's more of a curiosity to me, I am much more concerned with skills, work experience, and actual portfolio work .

If you're wondering, I am a web developer, I do soup-to-nuts front-end and back-end web work (PHP/MySQL/HTML/CSS/UI Design).

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