Freakonomics Radio - 30. Does College Still Matter? And Other Freaky Questions Answered ...

Episode Date: April 13, 2011

In our second round of FREAK-quently Asked Questions, Steve Levitt answers some queries from listeners and readers.

What kind of questions do you think we're going to get here? You think they're going to be like life advice, stock advice, or more like, you know, boxers or briefs kind of questions? Frequently asked questions from Freakonomics Radio. Here's your host, Stephen Duffner. So, you know, I'm just a writer and a radio host. But my Freakonomics friend and co-author Steve Levitt, he's a genuine Ph.D. 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 Frequently Asked

Questions. In our previous installment, Levitt talked about, among other things, the value of voting. The economists 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 most 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 health care 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. Levitt, how do you feel about this prospect today? Never been more ready. I like the confidence. Confidence bordering on cocky. You know me. All right, we'll begin. Leva, here's a question for you, something I've heard you talk about a lot. Interestingly, you've done some research on 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? 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. 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 you get will translate into an 8% increase in earnings over your lifetime. So someone who graduated from college would 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've 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, a 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, you know, one-fifth or one-tenth of what an American worker would demand to do it. So I tell you, I was in a taxi cab a few 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 taxi cab 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. 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? 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 the people who go to college are more motivated, smarter to start with? And how do you tease that out in the data? Yeah, that's a great question because so much of what we do in Freakonomics, Super Freakonomics, is all about distinguishing correlation from causality.

And what you worry about is that 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 this is 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 the 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 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 are 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. 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 and that a lot of them went to college who might not otherwise have and therefore resulted

in a – I mean, it's a strange unintended consequence of the Vietnam War draft, yeah? Right. That's right. They absolutely – so 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 are guys who didn't want to be in college and maybe, possibly, they would have

been happier living a life where they earned less money and didn't end up having those four years to go ride around, do hippie stuff or something like that. So who knows if they're really better off. They certainly earned more money. The answer, my friend, is blowing in the wind. The answer is blowing in the wind. The answer is blowing in the wind. Coming up, Levitt shares his opinion on health care reform, and it will not make his friends in the Obama administration very happy. Also, a look at Brazilian policing.

How many years can some people exist before they're allowed to be free? How many times can a man turn his head and pretend that he just doesn't see. From WNYC and APM, American Public Media, this is Freakonomics Radio. Here's your host, Stephen Dubner. Let me play another one here. Hi, my name is Tabby Lee. I'm from Denver, Colorado. I have a question for you. What do you think of the health care reform passed in 2010? Thank you.

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

So I think that's very disappointing to economists in that regard. Just explain why that's a bad idea. So people say, why doesn't it make sense to have healthcare tied to employment? Well, I think you actually want to turn the question around and say, why in the world, if you were 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 a situation where there are people who work, who get healthcare through their employer 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 health care 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 health care insurance be tied to my employer? It's just there's no fundamental reason why it should be that way.

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, 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. Yeah, I think that's exactly right, that you would think that if you had firms whose specific jobs were to provide health care 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 health care? So that's one piece of why you didn't like the health care reform, because it did nothing to weaken the link between employment and health care what's the other reason an even bigger problem with health

care 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 removal, 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 wanted the Mercedes for free. Well, people say, you can't have the Mercedes for free. You got to pay $50,000 for it. And you say, why not? Mercedes for free. Well, people say, you can't have the Mercedes for free. You've got to pay $50,000 for it.

And you say, why not? I have an inalienable right to free health care, right? Why don't I have an inalienable right to free Mercedes? And to me, it just makes no sense that health care 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 going to say, well, look, you've got to pay for some of this. You can either take the $150,000 that will 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 economics is a study of scarcity. And in a world where healthcare becomes more and more costly, the scarcity is going to be more and more binding, where you 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. Hi, this is Ricardo Castro calling from Sao Paulo in Brazil. At the end of 2010, the Brazilian army and the Brazilian police went up 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. Now 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 and other crimes? Best regards, Ricardo. What do you say?

Actually, Ricardo, I think neither of 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, you 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, you'll make it a lot harder on the drug dealers to sell drugs. So you will have that effect of reducing the number of 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 in to these areas. And even more so because these, I 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 and talking to people who have studied Brazilian police,

that indeed many of these police officers who are now guarding the 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. That does it. Our second installment of Frequently 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.