Bartending Bachelors? It’s the Wrong Question

Peter Orszag here considers the interesting and recent phenomenon of taxi drivers with college degrees. Tyler Cowen adds comment here. Let’s consider a few stylized facts about the emerging labor market:

  • There will be stark inequality.
  • College grads tend to be underemployed or unemployed unlike ever before.
  • Without good luck, you can expect to graduate with not insignificant debt.
  • There’s something about this “knowledge economy” thing. It’s probably good if you can take a derivative functions, and such.

There are two ways to have this conversation. We either talk about the “new economy” where paying the big bucks for an English degree isn’t worth it, but also where you can get a full computer science degree from a top school for less than $8,000. Or you talk about the “old economy” where people still care about the vanilla Bachelors. For signaling if nothing else.

I think Orszag, and too many others, speak in a hybrid construct; a mongrel between the old education and new labor market. That’s very understandable, because this is where we are today. Still, it’s broadly not a very useful discussion. The point of this post isn’t to pontificate about the future, but give some concrete predictions on college education vis-a-vis the labor market.

Here’s the money word: bundling. College, the experience, is contrary to popular belief mostly a consumption good. We’ve successfully disguised it as investment because the relatively small portion of it that was yielded huge dividends between 1950 and 1980. Bundling worked in this context, because the experience aggregated many different goods (English 101, Econ 102, etc.) into one. The consumption value of college exists today, but the economic fundamentals behind bundling do not. Here are features of a successful bundle (like pre-Netflix TV):

  1. Relative economies of scale and scope.
  2. Opportunity cost of bundling is low.
  3. Very high barriers to entry.
  4. There’s value from the bundling itself.
  5. And, most importantly, heterogenous demand. Technically, this means that for two agents, demand for components within the bundle are inversely correlated (you like Math relative to Physics, and me vice-versa).

(1), (3), and to an extent (4) probably will still exist in some form. But the opportunity cost of bundling will no longer be low. Bundling means a university has to congregate PhDs for about a 100 different fields within a physical locale, provide them with good salary, a good number of them with tenure, and all of them with good research activities. For teaching schools it means somehow convincing a PhD to get off the “publish or perish” mindset. For research schools it means ensuring strong research opportunities exist, for all disciplines.

Then you have to add agglomeration effects, which work deeply in favor of Harvard and MIT over a random university. If I’m a hotshot with a PhD in Math from Princeton, where do you think I want to go? (Hint: not Utah). All of this makes the non-established university, meant for the non-established students, an incredibly expensive operation. It’s been worth it, until a decade ago.

But things are worse today. Young whippersnappers today don’t want to learn from a third-rate professor in a lecture hall of 500. They can learn from, quite literally, the ustads of a field from online ventures. Yes, there’s a lot of skepticism about that today. But to the extent the new, “knowledge economy” is everything people fear, online education in its best form will exist. In the next ten years, highly versatile technologies will exist allowing students to interface across the globe in ways we can’t imagine.

How can a current bundler, with its non top tier professors, compete with the best future version of edX? Khan? Minerva? The bundlers will begin their slow descent into glorified credentialing services, and then test centers with Gothic halls.

With education debundled, students will no longer undergo a whole four years of education, but present disaggregated credentials for various courses. Tyler Cowen sees the future in, I don’t think, a dissimilar way:

The more likely scenario is that the variance of the return to having a college education has gone up, and indeed that is what you would expect from a world of rising income inequality.  Many people get the degree, yet without learning the skills they need for the modern workplace.  In other words, the world of work is changing faster than the world of what we teach (surprise, surprise).  The lesser trained students end up driving cabs, if they can work a GPS that is.  The lack of skill of those students also raises wage returns for those individuals who a) have the degree, b) are self-taught about the modern workplace, and c) show the personality skills that employers now know to look for.  All of a sudden those individuals face less competition and so their wages rise.  The high returns stem from blending formal education with their intangibles.

Except it’s not the variance that’s important. I see it this way. Every college student’s future earning potential, after controlling for background and genetics, is normally distributed. The uncertainty arises from intangibles (call this the Charles Murray factor) but also dumb luck. As Cowen has it, we would agree that it is the variance of means that increases when, in fact, it is the variance of variances. There’s no way to forecast this, or even form a Bayesian prior on what one’s normal distribution is. But we can assert that it exists, and that it will change.

It’s a little tricky to explain why I think this. An increase in variance, other things equal, means there’s a higher chance that someone with a lower mean (because they came from a poor family and such) will end up in the top decile. That’s clearly not the case. So we can take the inequality of prior means to be a background condition, the symptom of an unequal country. Within this context, the debundling of education will increase the variance by allowing students to more accurately target their strengths. There’s also much more room for falling below the curve without the guidance of an environment. The variance of variances increases because certain people, poor and not, will choose to take a “safer” path, that doesn’t lend itself to mobility.

Net net, you will see that more surprisingly poor kids make it “out” in the debundled world, than the counterfactual of our current education system. And you’ll see more people do even worse. So Cowen is right, in a sense, that the variance of the aggregate normal distribution will increase. However this is predicated on a background trend (inequality) that almost guarantees that result.

Variance across the aggregate normal is bad if it emerges from variance in individual means, and concentration of uncertainty among the bottom quintile. But variance on the individual, to the extent it is equally distributed, is a great thing. Variance kills despondence of the poor. It kills complacence of the rich. Indeed, we should do everything in our hands to make the prior normal distribution of a one year-old, just about as uncertain as possible.

That is the goal of a competitive society. It’s a well-known story that soon after the American Revolution, productivity stateside skyrocketed versus Britain. The absence of a state-protected aristocracy gave the American farmhand huge incentive to work hard, and get rich. His variance was high.

The “Great Unwinding” is better understood as not just a divergence of mean but also a contraction of variance. My certainty that I’ll never be “on the dole” – as an eerily high number of Americans, at one time or another, are – is a sign of societal ill. And the debundling of education can fix that.

A certain group will be exempt. Indeed, I expect that Harvard and Yale will last longer than America itself. The intense agglomeration economies within Ivy League and such schools, and the incredibly different population that attends, is removed from the scope of this observation. But take comfort that the top 25 schools graduate less than 1% of the population. Indeed, once the variance of variances of the population increases, competition to attend the Ivy League will follow suit, and next time around rich kids may not have the upper hand they do today.

Alas I am not predicting an end of inequality. But I do see in the Internet’s evolution a huge potential for more equal opportunity. I fear that too many will still be slave to genetics. Whether of looks, brains, or charm. What’s my most absurd belief? I will die in a Rawlsian society. At age 18, I will also say it is my most optimistic belief.


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