December 21, 2008

Student debt, social investment in education and the search for a basketful of school

At the Social Science History Association conference this year, there were "author meets critic" sessions on two important books, Kathryn Neckerman's Schools Betrayed: Roots of Failure in Inner-City Education and Claudia Goldin and Laurence Katz's The Race between Education and Technology. Together, the two books represent solid new work in understanding urban education (with Neckerman) or arguments about the relationship between education and the economy (with Goldin and Katz). In particular, Goldin and Katz's argument is both a brief in favor of investment in education and a reply to skeptics such as Alison Wolf, author of Does Education Matter? Myths about Education and Economic Growth (2003). (Wolf updates the older arguments along the lines of Berg, Freeman, and Braverman.)


In Neckerman's book, we see the behavior of parents and cities (or one city, Chicago), embedded in a very specific historical context. In Goldin and Katz's book, we see the behavior of parents and societies more generally, across more than a century. I suspect most of the reviews of Goldin and Katz will focus on their human-capital assumptions and their claims that the ratio of skilled-worker wages to unskilled-worker wages (and thus wage inequality) will drop if we move more of the workforce to the skilled (i.e., educated) end. I hope that at least a little of the discussion will make things a bit more complicated, not because Goldin and Katz are entirely wrong but because we need a better way to talk about how schooling works. Yes, education builds human capital, but it does a lot more, and even within a human capital lens, a focus on education and only education ignores a few other things. The rest of this post addresses some of the problems of social investment in education from within a human capital perspective. Criticism of that perspective and alternatives waits for another post.

Let's start with a family-strategy question: if you're a parent, what is the best strategy to make sure that your kids are healthy and happy adults and that they can raise their own children (your grandchildren!) in a life that makes you proud? A human-capital perspective says that education is the best investment, almost universally. Well, that's not quite right. If you happen to have five million dollars to invest in your child by age 25, you certainly can spend a good chunk of that money on what you could call human-capital investment: private schools, tutors, great experiences, colleges, grad school, etc. (You could also spend some of that money working less so you can spend quality time with your child; economists would still call that a good investment in human capital.) But you wouldn't spend all five million dollars that way: you'd invest the majority so that your child (and grandchildren) can have a safety net. (Let's assume that not all of that was invested in Lehman stock.) So for the very wealthy, education as human capital is part of a family strategy. If you're wealthy enough, your child will survive and do quite well almost no matter how foolishly she or he behaves as a young adult. But education is a good thing, too. In this framework, education is part of a diversification strategy. Even if you did invest $4 million in Madoff's enterprise or Lehman stock (along with other large chunks of the portfolio in WorldCom and Enron), your kid still has an education to fall back on. The one security of an education is that no one can foreclose on the knowledge in your head. In other words, education as human capital in part is a hedge for the very wealthy.

If you're extremely poor, your choices are much more limited. You worry about whether you can put food on the table and take your child to the doctor long before you worry about how to pay for college. There's no such thing as a nest egg you can put away for either yourself or your child, and everything is a matter of (often cruel) tradeoffs. The choice is sometimes between investing resources in immediate survival (absolutely necessary) or in education (a long-term investment with an inherently uncertain return). So in contrast with very wealthy families, formal education is both the best long-term investment and also one that is the most risky one... not because there are less risky ones but because there is no other option. 

The majority of Americans are neither very poor nor extraordinarily wealthy; most of us have enough to live on but not enough where our children's education is a hedge against other investments. For many parents, the choices are between approximately equally valued options, but they're often framed as avoiding harm: not making our children pay for us when we retire, not losing a house, not having our children on bread lines, etc. And all of the options have some risk and require tradeoffs. Do you save more for your retirement fund or save for your child's college? Do you pay for tutoring in middle school, knowing that doing so has a harsh long-term penalty for college savings, or do you hope that she or he gets straightened out and justifies socking away more for college? Do you get a new roof or save for college or get tutoring or stuff more money into the cash fund in case you're laid off ...? Oh, yes, and do you put in overtime and thus spend less time with your child? On the one hand, being "middle class" provides far more options than being very poor. On the other hand, the options are not necessarily easy choices or ones with great certainty.


Thinking about education as a family strategy should put a spotlight on the gap between a microeconomic perspective (that the rate of return on education makes it a good idea) and an individual or family perspective: individuals don't have a smooth return-on-investment ROI curve. You're employed, or not, or have part-time work, or work overtime. You only have one job (or two), and one salary (or two). Abstractions such as ROI make sense when you're speaking of populations, and millions of Americans understand that abstraction: that's why mutual funds have expanded so dramatically in the past few decades (well, expanded in investments before they shrank in value...). In buying a mutual-fund share, you're buying a basket of property, getting diversification on the cheap (well, if you watch the fees). But you can't diversify your family that much: "I'll send 5% of my son to manufacturing industry, 10% to financial services, 10% to information technology, ..." You make investment choices for one child at a time. And there are no guarantees for that child (or for you). On the whole, investing in education is a good choice. But you're still trusting to a great deal of luck.

And even if you look at populations, behavior can look inconsistent with the incentives microeconomists assume. Sociologist Roz Mickelson focused on such an inconsistency in her classic article, Why Does Jane Read and Write So Well? (1989), and her follow-up, Gender, Bourdieu, and the Anomaly of Women's Achievement Redux (2003) (both subscription based/$$ required). Why have women dramatically expanded college attendance in the past half-century, even as the return on that investment has lagged behind the value of college for men? Her argument five years ago was that women are more likely to try to balance the social value of different spheres in life: work, family, etc.


We'll come back to Mickelson and Bourdieu another time. Today, let's focus on the individual-population gap. To a great extent, the problem of student debt is that it concentrates the risk at the level of individuals and families. In contrast with purchasing private insurance or a social insurance program, either of which spreads risk, parents or college students take on substantial parts of the risk that the college education will not pay off, because of dumb luck either in the economy of the moment (cross-sectional dumb luck) or in the lifetime of the student (cohort dumb luck). 

As states have withdrawn support from undergraduate instruction, this privatization of risk has accelerated. If you care about equity, you should be worried by the consequences. But even if you don't care at all about fairness, you should still recognize that the assumption of greater risk will change the behavior of college students. (I won't call it distortion because I am not likely to be convinced that there is any theoretically neutral behavior of college students.) To be honest, I do not pretend to know for certainty how the behavior of college students changes with the assumption of greater debt. I will leave that empirical question to sociologists and economists.

I am not sure how to spread the risk across either individuals or cohorts. A tuition-free undergraduate education that public taxes support would be one way, but I suspect we're not headed there as a society. Among other reasons, people think that college students should bear some of the burden of their own education, a result of the vocational rhetoric surrounding college education (including the human-capital rationale itself). But even in a world with tuition and debt, there should be some way to create a "basketful of school," creative mechanisms that spread risk so that students from families of moderate means can attend college with the reasonable security that their futures are not going to be shackled to student debt.

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Posted in Education policy on December 21, 2008 12:27 PM |