Tag Archives: Education

34. Inflation Predictions, Elites vs Regular Joes

meThesis: Consumers with higher education and income can predict next year’s inflation rate better than their counterparts, i.e. the average consumer.

On last week’s blog post, in an effort to match up Michigan’s survey of inflation expectations, the Survey of Professional Forecasters (SPF), and a RW no-change forecast, all forecasting one-year ahead, I was unable to conclude beyond a reasonable doubt which forecast model would be the best for predicting inflation, but in this post I hope to redeem myself.

As we consider a consumer’s level of income and education, what should we expect to happen to their predictive power? Some intuition would tell us that as a consumer’s level of income rises, she may have a higher propensity to save, because she will have more excess funds. Naturally, she may invest these funds, and hold a portfolio comprised of stocks, bonds, and other securities, in order to grow her nest egg for retirement, or set money aside to cushion against economic downturns. Thus it would be important for her to frequently keep track of the inflation rate, to make sure that her investment is not eroded by price increases.

Poor-Man-Rich-ManGiven education, it is plausible that higher education on average leads to higher income for the consumer, which goes back to our previous argument on income. However we can also infer that more educated consumers are more likely to read the newspaper and be more informed about fluctuations in the inflation rate, a claim made by Christopher Carrol. Lastly it may be the case that more educated consumers are simply more likely to know what inflation is in the first place, as opposed to their counterparts. To test this claim, we can sum up the number of survey participants according to their income group, from the Michigan Survey, who did not know what to say when asked about their inflation expectation. We see there is evidence that indeed people with lower education were not able to provide an answer more frequently than individuals with a graduate degree. This is looking at the far ends of the education spectrum, but the relationship holds nonetheless, as we increase education, people less frequently fail to give an answer for their inflation prediction. Interestingly it seems that consumers with less than a high school education know less, on average, about inflation now than they did back in the 80s.

Knowledge of inflation

My claims above would have no ‘oomph’ to them if I didn’t back them up with any evidence. So are we right in assuming that higher education and income lead to better inflation predictions? The answer is a resounding yes!
Let’s take different education and income subgroups, using the Michigan Survey one more time, and lets take the median inflation expectation at each quarter for each subgroup. We use Median, because, this measure is more robust against outliers. (Note choosing mean expectation gives weaker results, in that I am able to statistically reject more often). Finally lets compare each subgroup against one another and see how well they do in comparison at predicting the median-CPI in our experiment. (Reason for this specific inflation measure is explained on last week’s blog). I also use the same Diebold-Mariano test used on my previous post, to test for statistical significance of predictive superiority amongst subgroups. The time period I analyze is 1982-2014, because 1981Q3 is when the SPF began.

So let’s look at the results! Below I report values for income, as the probability that the highest income group performs better than the alternative income groups. Likewise for education, I display the probability that those with graduate level education do better than their counterparts. Finally we put the highest education and income groups against the SPF, and settle the forecasting battle once and for all. In all of the following results, we should interpret them as probabilities in repeated trials.

Note: These are actually p-values, but I report them this way to make the results more intuitive.

Note: These are actually p-values, but I report them this way to make the results more intuitive.

The above table demonstrates that survey participants grouped in the top 25% bracket, consistently beat their counterparts with about 99% probability. However when the predictions of the top income group were tested against those from the SPF, there was only a 34.31% probability that the high income group would predict better. Similarly, there is large evidence that the group with graduate school education beats every other education group’s predictions with a 99% probability, except for those with a college Bachelor’s degree, but still beating them with a 92.08% probability. The high education group also lost miserably to the SPF, with a probably of fairing better than the SPF of 27.69%. We get very similar, statistically significant results, when we compare the alternative income groups against a lower levels of income and education against the lowest income and education levels. From this we gain two conclusions:

1. As income and education increase, predictive ability for inflation increases unambiguously.
2. There is no subgroup from the Michigan survey that can predict the inflation better than the SPF, at least to a statistically significant level like.

Here is a graph comparing graduate level education vs less than high school, and the top 25% income group against the bottom 25% (For those more visually inclined 🙂 ) What we see is that the results are consistent with those in the table above. One thing to note is that inflation expectations for low education and income groups are higher  than their counterparts for most of the time period analyzed (1982-2014).
High vs low income High vs low education

One final note, I find out conclusively that the SPF does better than any income group, except the Top 25%, although the SPF probably does better, we cannot tell beyond a reasonable doubt. This result would satisfy the claim in the beginning of the post that those with higher incomes may have a higher predisposition to know the inflation rate,  because it is only those in the top 25% income bracket that are able to make predictions somewhat as close to the SPF’s. This claim would be consistent with the fact that about half of Americans hold any assets, hence only individuals in the highest income groups would have any interest in the inflation rate.

Reform Education (Revised)

Thesis: Education reform will be one of the most important innovations of the next 50 years and will be best accomplished using the teacher as a reference point with most learning done individually.

Most people when asked about education, specifically college education, say it is way too expensive. College education, while valuable, needs to be reformed both from a pricing standpoint but more importantly, from a structural standpoint. Individual learning aided with the help of teachers is in my opinion, the future of education.

My argument, while being able to decrease the cost of college education, is more focused on the learning aspect of education. When I go to a large lecture, it is very difficult to pay attention. Between the thousands of websites and social media applications available to kids today, it is no wonder many people report this exact problem. Even if I do pay close attention, I think I could teach myself most of the material in less time. With the help of textbooks and the internet, along with slides provided by the professor, there is no doubt I could teach myself the material. This is why my solution to the problem of education is to make the teacher a reference point for questions. The teacher would assign weekly readings and add lecture slides at the beginning of the week. The entirety of lecture would be online and be dedicated to answering students questions, similar to office hours. This way, the student would “teach” him or herself all of the material before “class” and any material they do not understand could be answered with the help of the teacher. All students could engage in the forum and ask questions while other people watched and benefited from the experience.

The cost of college education has risen to around $23,000 dollars per year. This number is sure to increase if something does not change. Just ten years ago, the average price was $13,000 dollars. http://nces.ed.gov/fastfacts/display.asp?id=76. This is a substantial increase and unless structural change takes place, the cost will keep rising. The University of Texas School of Architecture has an interesting breakdown of the cost of college education. According to them, nearly 60% of the cost of tuition is for university professors and staff’s salaries and benefits. http://www.utexas.edu/tuition/breakdown.php. While my proposal will not eliminate these costs, it should substantially decrease them. The teacher would benefit from this design by not having to go to lecture and teach the same thing repeatedly. They could use slides from previous years and benefit themselves from the potentially thought provoking discussions on the forum. This could lead to a decrease in salaries. In addition, teachers could have more time for research and because of this, administrators could lessen their salaries as they push for a research based compensation. In addition, operating expenses make up around 17% of the total cost of college. This could be nearly eliminated as the infrastructure needs at a traditional university are lessened. Classrooms would be nonexistent and the overall cost of maintenance would drop.

Overall, college is a time of great learning and growth. However, the system is flawed and I think change is in order. With my proposed plan, the cost of college education could fall and the overall learning and efficiency would increase dramatically. Unless this change occurs, I fear prices will continue to increase and the US will continue to fall behind other countries from a learning standpoint.

Thesis: Online Education’s Best Days are Behind Them

Everyone has seen advertisements for some online college campus such as University of Phoenix which strive to offer cheap affordable college classes that are convenient for anyone to take, since the classes are all online. This industry has grown tremendously over the previous 10 years as the cost of college has been rising at a much faster rate than inflation (as witnessed by the graph below).

fredgraph

The rising costs of college are one of the reasons that online university courses became such a prominent alternative to traditional colleges. These universities offered not only convenience, but huge savings when compared to other college campuses. This was due to not only saving on room and board, but as mentioned in Spencer Jakab’s article, “During the 2009-2010 academic year, one-quarter of all Pell Grants and subsidized federal loans went to students at for-profit colleges [such as Apollo Education Group], according to the College Board. That was well above their share of, say, graduates.” These subsidies for the students attending colleges like University of Phoenix even further reduced the cost and increased the savings these consumers felt.

However, this story does not end well for these for-profit online schools as enrollment, and revenue, have decreased significantly from their peak a few years ago. One potential reason for this huge decrease in the early 2010’s of these online college degrees was due to as pointed out in Kevin Carey’s article, “Over the course of a few months in early 2012, leading scientists from Harvard, Stanford and M.I.T. started three companies to provide Massive Open Online Courses, or MOOCs, to anyone in the world with an Internet connection. The courses were free. Millions of students signed up. Pundits called it a revolution.” These online courses are taught by some of the most prestigious teachers in the world, and all that is needed is an internet connection. While this reformation of higher education is revolutionary and is only going to keep increasing its prominence as credentials begin to become recognized by employers from taking these courses, the importance of getting an actual college degree remains significant.

A more viable reason for the decrease for-profit online education schools have felt in enrollments and revenues comes straight from the White House. President Obama announced “his new $60 billion community college initiative to provide two years of community college for free in January.” These community colleges are University of Phoenix’s biggest competitor because they both target people who cannot (or choose not too) pay the steadily rising prices to go to a traditional college. This initiative, if and when passed, will be the final crippling blow to these online for-profit schools that have gained prominence these past few years.

Reform Education

Thesis: Education reform will be one of the most important innovations of the next 50 years and will be best accomplished by using the teacher as a reference point with most learning done individually.

Most people when asked about education, specifically college education, will say it is way to expensive. College education, while valuable, needs to be reformed both from a pricing standpoint but more importantly, from a structural standpoint. Individual learning aided with the help of teachers is in my opinion, the future of education. The cost of college education has risen to around 23,000 dollars. This number is sure to increase if something is not done. Just ten years ago, the average price was 13,000 dollars. http://nces.ed.gov/fastfacts/display.asp?id=76This is a substantial increase and unless structural change takes place, the cost will most likely keep rising.

When I go to a large lecture, it is very difficult to pay attention. Between the thousands of websites and social media applications available to kids today, it is no wonder many people report this exact problem. The teacher will lecture for an hour and a half and I will get very little out of the lecture. Even if I do pay close attention, I think I could teach myself most of the material myself in less time. With the help of textbooks and the internet, along with slides provided by the professor, there is no doubt I could teacher myself the material. Many people will argue that they learn better listening to a lecture. This is why my solution to the problem of education is to make the teacher a reference point for questions. The teacher would assign reading and perhaps lecture slides at the beginning of the week. The teacher would be adding value via the slides which would be supplemented with reading from the book. My change would be how lecture is presented. The entirety of lecture would be dedicated to answering students questions, similar to office hours. This way, the student would “teach” him or herself all of the material and any material they do not understand could be answered with the help of the teacher.

The way of learning offers many advantages over the current way learning occurs. First, the student does not have to sit through a mundane lecture or even attend lecture. They can use their time more valuably without getting penalized. Then when a question comes up, the student can go to “lecture” and ask the questions they have. This would force students to do the work and actually read all of the required reading. In addition, this would also lower the cost of college education as this new system progresses. Instead of going to “lecture” the entire class could be taught online. The teacher could have online “office hours” which would replace lecture. This would substantially decrease the cost of college education.

The governor of Georgia recently proposed an education reform in the state, which mainly deals with helping children falling behind. http://www.bizjournals.com/atlanta/blog/capitol_vision/2015/03/georgia-house-panel-oks-gov-deals-education-reform.html. While this is a good start, I think college education is in the most need of reform given how expensive it is. Overall, college is a time of great learning and growth. However, the system is flawed and I think change is in order. With my proposed plan, the cost of college education could fall substantially and the overall learning and efficiency would increase dramatically. Unless this change occurs, I fear prices will continue to increase and the US will continue to fall behind other countries from a learning standpoint.

[Revised] Why Educational Investment is Non-Negotiable

The United States must invest in education because of the returns to GDP an educated population can create.

When addressing current economic issues one cannot ignore human capital, specifically investment in education. Educational outcomes strongly affect the economic growth of a country. George P. Shultz and Eric A. Hanushek, contributors for The Wall Street Journal, compared the GDP-per-capita growth rates between the years 1960 and 2000 with achievement results as determined by an international math assessment test. The majority of countries followed a straight line that revealed that as the scores on the assessment test increased so did economic growth. Although the U.S. remained above the average, this position will not hold strong for long in the future unless we make significant increases in overall education in the U.S. Students of today, the labor force of the future, are no longer competitive in comparison to other developed countries. The U.S. was ranked 31st in math according to the OECD’s Programme for International Student Assessment, an alarming statistic.

The importance of education on the economy cannot be understated. Better education leads to a faster growing economy. Education directly correlates to higher wages. The median weekly earnings in 2013 were $472 for someone with less than a high school diploma compared to $1,108 for individuals with a bachelor’s degree. Educational disparities lead to economic disparities that without new reform will maintain and foster the inequality problems that continue to hurt the economy for decades to come. For this reason, we must increase national investment in education.

Screen Shot 2015-02-26 at 3.32.25 PM

Noah Berger and Peter Fisher, researchers from the Economic Policy Institute, investigated how the state government can boost the economic well-being of their people. Berger and Fisher revealed that high-wage states are the same states with well-educated workforces, which reveals a strong correlation between educational attainment of a state’s workforce and median wages. Therefore, investing in state-wide education is necessary to build a strong foundation for economic prosperity. The U.S. must focus on educational investment soon. In addition to building a strong base, investing in education upfront will show a greater return in the long run in terms of state budgets. Since individuals with higher levels of educational attainment will ultimately have higher incomes, these individuals will therefore contribute more to the state’s taxes over the course of their lifetime.

The students of today are the laborers of the future. The need to invest in education is non-negotiable when considering the investment that is being made. Without an educated labor force our economy will suffer, but with an increased investment in education the possibilities look promising.

 

Why Colleges Engage in Price Discrimination

Colleges should continue to engage in price discrimination so lower income students may continue to obtain higher education.

The relationship between tuition costs and the economy is a complicated one. Since 1978 the cost of college tuition has increased by 1,120%. This rate is four times higher than the consumer price index. The result of this rapid increase has been spun by the government and to the media with a negative undertone without understanding of the full story. The government and media portray the cost of college as unobtainable to the majority of the country. However, what they do not understand is the difference between full list price and average net price and ultimately how this difference explains the expanding cost of college. For example, Harvard’s full price of tuition is $59,800 per year, but the average price paid by students and their families who qualify for financial aid is significantly less at $15,550. Similar to how the government operates progressive income taxes, colleges are following a progressive pricing model. Due to the high number of applicants each year, colleges are able to be selective in choosing who attends. Similar to most businesses, when you have an overwhelming demand, increasing the prices follows suit, or in this situation increasing tuition costs.

Price discrimination occurs when businesses charge consumers different amounts for the same goods and/or services. Colleges are capitalizing on price discrimination, which at first may seem unjust, but ultimately works in favor of the majority consumers. Take an airline company for example. Ticket prices are higher for business travelers than for the average consumer. Without this difference in prices, flying would no longer be affordable to such a wide range of individuals. College tuition works in the same manner. By examining how much each individual student and/or family is able to pay through financial aid applications, the school can tailor the amount of tuition to match. Unfortunately, this means that the wealthy group of students has to pay a higher price in order for less fortunate individuals to attend. Federal taxes work in the same manner, which is ironic considering the majority of the fight against rising tuition costs come from the government itself.

In order for secondary education to be expansive to the majority of the population, price discrimination and tuition increases are part of the price. In the end, the investment is worthwhile as the economic return on college education is positive for both the individual and economy at large. The larger earning potential for individuals as well as lower unemployment rates, the better off the economy is. Before President Obama and the media make another statement regarding their desire to lower tuition prices, they should consider how this decrease will effect the amount of financial aid available to lower income students.

The most certain policy for better economy

There are numerous ways or policies that we can employ for better economies.Most people know what state government should do in order to boost economies but there are always conflicts over choosing the best option to promote the economic well being of their people. This is because people are not always 100 percent sure about the outcome of economic policy. In other word, people cannot fully expect what their decision will cause in the future. Of course, there are a variety of means or economic policies for our better future such as investment in public infrastructure, technologies, health services and others but there is one factor that we are always confident about its positive effects, which is education.

Some people have tendency that people can succeed without having a college degree and give examples of Bill Gates, Marc Zuckerberg, Rachael Ray, Walt Disney and other successful business founders. However, we should face the reality that most people are different from them. When you consider the number of successful people who do not have a college degree, you would realize that those people are very special. Those people who belong to top 0.001 % are capable of expecting what people will need in future and ability to make what people want Unfortunately, most people do not belong to top 0.001 %.

Education is one of the most fundamental factors of development. No country can accomplish persistent economic development without investing a substantial amount of money and efforts in human capital. The main reason why we should focus on education for better economies is simple. The worker’s productivity is highly correlated with worker’s skills. When the workers are equipped with high skills, it means his or her productivity is also high, which contributes to a higher level of gross domestic product. Moreover, education not only augments people’s productivity, but it also promotes creativity and technological advances as exemplified by countries like Japan, United States, Finland, Germany and South Korea. Although United States is an exception since they have a lot of natural resources compared to these four countries, other countries could accomplish a high GDP growth without resources because of their a huge investment in technologies. Technologically advanced countries are capable of promoting the economic well being with their human capitals.

Some people would wonder why most countries in Africa have been failing to become rich countries even if they retain a large amount of natural resources. This is because people in developing countries are not well educated and hence they have to rely on other foreign countries for extracting their resources. If these developing countries invest more money and time in human capitals, they will likely to succeed to promote their economic growth.

What is Holding the US back from Metrification?

Of the 200 or so sovereign nations in the world, only three remain that have not officially adopted the international system of units, more commonly known as the metric system.  Those three?  Myanmar, Liberia, and the United States.  In the past few years, both the Liberian and Burmese governments have taken measures to adopt the metric system, so why has the United States made no effort to ensure that it is not the last nonconformist in the world?

globalmetrification
Map showing adoption of the metric system by country (source: wiki)

It may surprise you to hear that the United States actually has made such an effort: in 1975, President Gerald Ford signed into law the Metric Conversion Act, stating “To say that this legislation is historic is an understatement. The question of a common measurement language is, in fact, nearly as old as our country. President George Washington raised the issue in his first message to Congress on January 8, 1790” (source: UCSB American Presidency Project).  Indeed, our country’s founders gave great thought to establishing an intuitive measurement system, and Thomas Jefferson proposed a base-ten measurement system of his own design, yet the United States still settled on the imperial system, partially because the metric system had not been designed yet at that point.  So if our nation’s leaders have made tangible efforts to shift us towards a more logical system of measurement, why haven’t we?

In our nation’s infancy, it was our close ties to Great Britain that kept us on the imperial system.  As the country matured and industrialized, it became more dependent on the existing system.  Britain switched over to the SI system to conform with the rest of eastern Europe, but the United States has something that Britain doesn’t have: a large domestic consumer base.  With no need to rely on exports, the US economy was able to develop with an independent measurement system.  Today, the barriers to adopting a new system are larger than ever before.  The costs of a transition would be enormous: infrastructure systems like our road signage would have to be completely redeveloped, product labeling and manufacturing goods would have to be swapped out, and our education and training techniques would have to change, to name a few expenses.  But it is undeniable that there would be massive benefits.

The National Institute of Standards and Technology claims that “current effort toward national metrification is based on the conclusion that industrial and commercial productivity, mathematics and science education, and the competitiveness of American products and services in world markets, will be enhanced by completing the change to the metric system of units”, as quoted in Scientific American.  In a global marketplace where the American education system is falling behind to those of other developed nations, the US should be doing all that it can to ensure that it can still produce engineers and scientists that can compete with those being born elsewhere in the world.  But keeping up with other leading STEM countries is just one of the benefits.  The metric system, with its base-ten units, simply makes more sense for industry.  As Thomas Rutherford writes in a Colorado State University publication, the savings from productivity and quality could amount to 1% of construction costs in industries like highway construction, savings that would quickly add up to massive sums over the course of just a few years.  On top of this, our industries would be able to import and export durable machinery goods to the rest of the world.  The rewards would be countless, and would quickly exceed the costs in the same way that an initial investment can provide perpetual returns.  And yet, it is still a topic that incites discomfort amongst Americans.  No generation wants to be the one who has to bear the costs: both literally and the mental burden of changing the way we perceive measurements.  That is why the process must be a gradual one.  It must start from the bottom up.  The US should begin to emphasize the metric system more in early education, even if it means teaching two systems of measurements for a time.  The longer we wait, the more we lose out – the opportunity costs of staying on the imperial system are only rising.

Why Educational Investment is Non-Negotiable

When addressing current economic issues one cannot ignore human capital, specifically investment in education. Educational outcomes strongly affect the economic growth of a country. George P. Shultz and Eric A. Hanushek, contributors for The Wall Street Journal, compared the GDP-per-capita growth rates between the years 1960 and 2000 with achievement results as determined by an international math assessment test. The majority of countries followed a straight line that revealed that as the scores on the assessment test increased so did economic growth. Although the U.S. remained above the average, this position will not hold strong for long in the future. Students of today, the labor force of the future, are no longer competitive in comparison to other developed countries. The U.S. was ranked 31st in math according to the OECD’s Programme for International Student Assessment, an alarming statistic.

The importance of education on the economy cannot be understated. Better education leads to a faster growing economy. Over the next 80 years improvements in GDP could ultimately exceed $70 trillion, which plays out to be an average boost of 20% for every U.S. worker each year over the course of his or her career. In addition, education directly correlates to higher wages. The median weekly earnings in 2013 were $472 for someone with less than a high school diploma compared to $1,108 for individuals with a bachelor’s degree. Educational disparities lead to economic disparities that without new reform will maintain and foster the inequality problems that continue to hurt the economy for decades to come.

Noah Berger and Peter Fisher, researchers from the Economic Policy Institute, investigated how the state government can boost the economic well-being of their people. Berger and Fisher revealed that high-wage states are the same states with well-educated workforces, which reveals a strong correlation between educational attainment of a state’s workforce and median wages. Therefore, investing in state-wide education is necessary to build a strong foundation for economic prosperity. In addition to building a strong base, investing in education upfront will show a greater return in the long run in terms of state budgets. Since individuals with higher levels of educational attainment will ultimately have higher incomes, these individuals will therefore contribute more to the state’s taxes over the course of their lifetime.

The students of today are the laborers of the future. The need to invest in education is non-negotiable when considering the investment that is being made. Without an educated labor force our economy will suffer, but with an increased investment in education the possibilities look promising. Just imagine if our GDP could exceed $70 trillion and what that amount of money could do to help pay off the U.S. debt.

Revisiting South Korea’s Education System – Are the Costs of Success Too High?

In my last post I made the point that South Korean education officials were mistaken in their attempts to curb high achievement. My assertion was based on the principle that a better educated work force would be both more innovative and more productive and this, in turn, would drive economic growth. Actions to curb achievement, I argued, proved shortsighted;  Any loss to South Korea’s economy due to a transitory slackening of consumption would be offset by a long-term trend of growth. I would like to qualify this position on the following basis:

In the New York Times article “An Assault Upon Our Children: South Korea’s Education System Hurts Students ”, former South Korean student Se-Woong Koo exposes what might be considered the underbelly of South Korea’s  academic success. As suggested by the title of his article, Se-Woong describes the backdrop of South Korea’s school system as a scene of suffering: one in which parents are strict, teachers are overbearing, and the costs to the health of South Korean children (physical, psychological, and emotional) are appreciably high.

He offers an account of his older brother’s former stress and subsequent chest pains as the toll of an educational system ripe for both censure and overhaul. His mother became convinced of this, and moved Se-Woong and his brother out of Seoul South Korea to Vancouver where they could finish out their high school years in a less stressful environment.

Following Se-Woong’s insight, it is important to conceptualize students’ wellbeing in a more nuanced way than can be done by simply ranking the international test scores of one country over another. By extension, overall wellbeing (read utility?) and improvements thereof are not captured entirely by expected jumps in growth rate, or in cold, hard figures like gdp per capita. For one, these are averages, but more importantly neither of these takes into account less commonly measured aspects of wellbeing or equally important developmental objectives such as increased personal agency.

South Korea was ranked the world’s best educated country in NGO NJ Med’s global rankings. This, however, may not correspond with a desirable trajectory of development for the country if it comes at the expense of freedom of choice, freedom from excessive stress, and freedom from sickness for South Korea’s high achieving students.

Considered in this context, a country’s development is a function of its citizens’ overall wellbeing just as much as it is a function of the average citizens’ access to education, employment opportunities, and consumer goods.

All else being equal, a country that prioritizes educational achievement is one that drives the rate of economic growth higher than one that affords its citizenry fewer opportunities for self-improvement and skill development. My initial argument still stands as to why this is this is a favorable outcome even in the face of drooping short-run consumption and higher rates of household debt. However, all else is not equal. If the cost of South Korea’s high achievement is its children’s wellbeing, perhaps South Korea should think twice for reasons other than current consumption patterns.