But @AOC wants the working class to pay off her loan

Most student loan balances are less than the price of a new car

Image

More on those student loan cry babies

actual and breakeven graduate premium

.@_ChloeSwarbrick takes to politics like a natural; #alternativefacts on #studentloans

Image

Students do whinge about the small debts they must repay

Image

.@nzteu is right, student loans entrench inequality

Those of European ethnicity had a median net worth of $114,000, compared with $23,000 for Māori , $12,000 for Pasifika and $33,000 for Asians according to the latest Statistics New Zealand data just released.

The Tertiary Education Union made great play about how much of the low net worth of young people and others is due to student loans

Young people (aged 15–24) had the lowest individual median net worth of any age group – just $1,000. The most common debt for young people is education loans.

The union then goes on to say that

Median education loan liabilities are only one-tenth of Pākehā people’s median assets, but they are a quarter of Māori people’s assets and over a third of Pacific people’s assets (table 7.01).

The data shows that the households with the smallest median net worth have the largest median education loans (table 2.02). These loans make up nearly a quarter of their total debt (table 2.03).

Over a third of households within the poorest quintile of net worth have education loans, whereas less than a tenth of households in the wealthiest quintile have education debt (table 2.04).

In a nutshell, not enough people are going to university because of the prospect of repaying student loans and more would go if it were cheaper and that would reducing inequality. The explosion in tertiary educational attendance over the last generation, an increase of about 150% for the adult population aged 25 to 64 was not good enough to reduce inequality.

Free tuition at University is a hand-out to those already had a good start in life. It will be paid for by those who will never go because they do not have an above average IQ.

Low-cost student loans were supposed to be away to reduce inequality. Instead, they give a flying start to those of already above-average talents. If social justice is to mean anything, it does not involve giving freebies to those who already have a head start in life.

image

The average student loan debt is about $14,000 while the lifetime earnings premium from university education is about $1/2 million in New Zealand.

image

Source: Statistics New Zealand, Household net worth statistics: Year ended 30 June 2015.

Lowering university tuition fees and easing the terms of student loans simply means that those who do well at university will not have to pay back as much to the government. People who succeed at university already have above average IQs so they already had a good head start in life.

Charles Murray points out that succeeded at college requires an IQ of at least 115 but 84% of the population don’t have this:

Historically, an IQ of 115 or higher was deemed to make someone “prime college material.” That range comprises about 16 per cent of the population. Since 28 per cent of all adults have BAs, the IQ required to get a degree these days is obviously a lot lower than 115.

Cheaper higher education does not help the not so smart secure a qualification they lack the innate talent to earn with decent marks and increases the chance of smart men and women marrying. This increases the inequality between power couples and the rest.

dodgy @OECD paper on inequality & growth doing the Twitter Left rounds again

Rick Noack did a great job in the Washington Post today to concisely summarise the hypothesis behind the OECD’s claim that inequality holds back growth. In the case of New Zealand 15 ½ percentage points of economic growth was lost due to rising equality since the late 1980s.

Source: How inequality made these Western countries poorer – The Washington Post.

According to the OECD, it is all about the ability to lower middle class and working class families to finance the human capital investments of their children. The OECD theory of inequality and lower growth is there is a financing constraint because of inequality that reduces economic growth because of less human capital accumulation by lower income families.

Source: How inequality made these Western countries poorer – The Washington Post.

In an age of interest-free student loans or cheap student loans everywhere for several decades now at least, the OECD is nonetheless hanging its head on the notion that not enough has been done to ensure there is enough graduates from the lower middle class and working class families making it to university. Taylor also has the same problem as me with the OECD’s human capital and inequality nexus:

There are a few common patterns in economic growth. All high-income countries have near-universal K-12 public education to build up human capital, along with encouragement of higher education. All high-income countries have economies where most jobs are interrelated with private and public capital investment, thus leading to higher productivity and wages. All high-income economies are relatively open to foreign trade.

In addition, high-growth economies are societies that are willing to allow and even encourage a reasonable amount of disruption to existing patterns of jobs, consumption, and ownership. After all, economic growth means change.

One of the findings of the Coleman report in the 1960s, which is been pretty much backed up since then such as by top labour economists such as James Heckman, is family background is the key to skills development in children, not the quality of their schools or their access to finance for higher education.

Schools work with what families present to them in terms of innate ability, and personality traits such as to pay attention and work. There is not much difference between an average bad public school and an average good public school when it comes to getting on in life. Going to really bad public school is different from just going to an average bad public school in terms of the chaos imposes on a child’s education and upbringing. What matters is the home environment rather than the ability to access good schools and families of ordinary means to finance higher education for their teenagers.

Most of the skill gaps that are present at the age of 18 – skill gaps which substantially explain gaps in adult earnings and employment in all groups – are also present at the age of five (Cunha and Heckman 2007). There is much evidence to show that disadvantaged children have lower levels of soft skills (non-cognitive skills): motivation, persistence, self-discipline, the ability to work with others, the ability to defer gratification and plan ahead, etc. (Heckman 2008). Most of the skills that are acquired at school build on these soft skills that are moulded and reinforced within the family.

In 2002, with Pedro Carneiro, James Heckman showed that lack of access to credit is not a major constraint on the ability of young Americans to attend college. Short-term factors such as the ability to borrow to fund higher education has been found to be seriously wanting as an explanation for who and who does not go on to higher education.

Only a small percentage of young people are in any way constrained from going on to higher education because of the lack of money. This is not surprising in any society with student loans freely available at low or zero rates without any need to post collateral. Heavily subsidised tuition fees and cheap student loans have been around for several generations.

Source: James Heckman.

The biggest problem with the OECD hypothesis linking a lack of skill development within lower income and working class families is it is such an easy problem to solve for the ambitious politician of either the left or the right by throwing money at the problem. Schooling until the age of 16 has been free for a century and universities have been virtually free for at least two generations. Lack of access to a good education does not cut it as the explanation for large disparities in growth rates.

The OECD and more recently the IMF have placed a lot of weight in access to human capital as a driver of inequality because human capital accumulation is hypothesised to be a major driver of economic growth.

The evidence that human capital is a key contributor to higher economic growth is weakening rather than strengthening. If human capital accumulation is not a major driver of productivity growth and productivity disparities, the inequality and growth hypothesis of the OECD and the IMF based on access to finance for human capital accumulation does not get out of the gate. Moreover, as Aghion said:

Economists and others have proposed many channels through which education may affect growth–not merely the private returns to individuals’ greater human capital but also a variety of externalities.

For highly developed countries, the most frequently discussed externality is education investments’ fostering technological innovation, thereby making capital and labour more productive, generating income growth. Despite the enormous interest in the relationship between education and growth, the evidence is fragile at best.

The trend rate of productivity growth did not accelerate over the 20th century despite a massive rise in investments in human capital and R&D because of the rising cost of discovering and adapting new technological knowledge. The number of both R&D workers and highly educated workers increased many-fold over the 20th century in New Zealand and other OECD member countries including the global industrial leaders such as the USA, Japan and major EU member states.

Cross-country differences in total factor productivity are due to differences in the technologies that are actually used by a country and the degree in the efficiency with which these technologies are used. Differences in total factor productivity, rather than differences in the amount of human capital or physical capital per worker explain the majority of cross-country differences in per capita real incomes (Lucas 1990; Caselli 2005; Prescott 1998; Hall and Jones 1999; Jones and Romer 2010).

Differences in the skills of the individual worker or in the total stock of human capital of all workers in a country cannot explain  cross national differences in value added per worker at the industry level.

  • The USA competes with Japan for productivity leadership in many manufacturing industries.
  • The Japanese services sector productivity can be as little as a one-third of that of the USA.
  • Japanese labour productivity is almost twice Germany’s in producing automobiles and is better that Germany by a large margin for many other manufactured goods.
  • The USA is uniformly more productive in services sector labour productivity. For example, British, French and German telecom workers were 38 to 56 per cent as productive as their American counter-parts.

The USA, Japan, France, the UK and Germany all have relatively well-educated, experienced and tested labour forces. For example, the 1993 McKinsey’s study inquired into the education and skills levels of Japanese and German steel workers. Comparably skilled German steel workers were half as productive as their Japanese counterparts (Prescott and Parente 2000, 2005).

The ability to finance human capital accumulation and go to good schools is a weak theory of inequality. Human capital accumulation itself is a weak theory of growth unless linked to sophisticated theories of the institutions fostering innovation and technology absorption which it now is.

To be fair, I will not point out that this period of rising inequality since 1980s so damned by the OECD and the Twitter Left in the Washington Post today coincided with the return of real wages growth in New Zealand after 20 years of wage stagnation. That would be kicking the Twitter Left when they are down. I was a sneak in a graph instead.

Data source: New Zealand Council of Trade Unions.

I will leave it for your own imagination to think of what happened to female labour force participation, the gender wage gap and female participation in higher education since the late 1980s and the onset of this horrific inequality which was mainly for men.

The failure of the Twitter Left to undertake a gender analysis of any labour force or income statistic they use is a major analytical shortcoming. Hardly any labour force statistics make any sense unless broken down by male and female outcomes.

Who gains most from making higher education more accessible through loans and subsidised fees

11109302_946370358739024_7114316743574635464_n

Trends in Income Inequality and its Impact on Economic Growth – OECD – is it all about not enough graduates – updated?

The analysis of the OECD published overnight depends crucially upon how greater inequality reduces the ability of the lower income families to invest in human capital.

The OECD theory of inequality and lower growth is there is a financing constraint because of inequality that reduces economic growth because of less human capital accumulation by lower income families.

Proportion of adults aged 25–64 years with an educational qualification of at least upper secondary level and tertiary level, 1991–2009

Figure K4.1 Proportion of adults aged 25–64 years with an educational qualification of at least upper secondary level and tertiary level, 1991–2009

In a nutshell, not enough people are going to university. Apparently,  the explosion in tertiary educational attendance over the last generation, an increase of about 150%  for the adult population aged 25 to 64, was just not good enough.

But what about adults aged 25 to 34, recent graduates, how many of them are there?

image

There was an explosion of young New Zealanders in the late 1990s who qualified for a degree from a university or diploma from a Polytech.

Under the hypothesis of the OECD about financial constraints retarding the accumulation of human capital among the lower middle class – the fourth decile of the income distribution –  even more young New Zealanders should have gone to university or Polytech.

Are there many New Zealanders left who are qualified and suited to tertiary education who do not go?

That is the crux of the OECD position: not enough lower-middle-class New Zealanders go on to obtain higher education and upgrade their skills because of financial constraints in a country was in interest free student loans,  means tested student allowances, and the government subsidises for 75% of all tuition fees. Tuition fees only equal 25% of the actual cost  and any one can get a student loan to cover this fee.

Trends in Income Inequality and its Impact on Economic Growth – OECD working paper (9 December 2014) – updated

Figure 1: Estimated consequences of changes in inequality (1985 – 2005) on subsequent cumulative growth (1990-2010)

image

Drawing on harmonised data covering the OECD countries over the past 30 years, the econometric analysis suggests that income inequality has a negative and statistically significant impact on subsequent growth.

In particular, what matters most is the gap between low income households and the rest of the population.

In contrast, no evidence is found that those with high incomes pulling away from the rest of the population harms growth.

The paper also evaluates the “human capital accumulation theory” finding evidence for human capital as a channel through which inequality may affect growth.

Analysis based on micro data from the Adult Skills Survey (PIAAC) shows that increased income disparities depress skills development among individuals with poorer parental education background, both in terms of the quantity of education attained (e.g. years of schooling), and in terms of its quality (i.e. skill proficiency).

Educational outcomes of individuals from richer backgrounds, however, are not affected by inequality.

via Trends in Income Inequality and its Impact on Economic Growth – Papers – OECD iLibrary.

The OECD analysis published overnight in Paris suggest that the increase in equality in New Zealand the late 1980s is still scarring economic growth today by about 15 percentage points in lost cumulative economic growth.

The analysis of the OECD  published overnight depends crucially upon how greater inequality reduces the ability of the lower income families to invest in human capital:

The evidence strongly suggests that high inequality hinders the ability of individuals from low economic background to invest in their human capital, both in terms of the level of education but even more importantly in terms of the quality of education.

The OECD theory of inequality and lower growth is there is a financing constraint because of inequality that reduces economic growth because of less human capital accumulation by lower income families.

This is interesting because in 2002, with Pedro Carneiro, James Heckman showed that lack of credit is not a major constraint on the ability of young Americans to attend college. They found that credit constraints prevent, at most, 4% of the U.S. population from attending. Credit constraints is weakening as a rationale for a lack of an accumulation of human capital, and can be easily solved.

The OECD is putting a lot of their growth inequality nexus eggs in one basket. That student loans and other government interventions are not closing credit constraints on financing higher education.

To add to that basket , they are placing a lot of weight in human capital as a driver of growth, and in New Zealand’s case,  of technology absorption, which is a main foundation of economic growth in New Zealand. The evidence that human capital is a key contributor  to higher economic growth is weakening ruck rather than strengthening.

The trend rate of productivity growth did not accelerate over the 20th century despite a massive rise in investments in human capital and R&D because of the rising cost of discovering and adapting new technological knowledge. The number of both R&D workers and highly educated workers increased many-fold over the 20th century in New Zealand and other OECD member countries including the global industrial leaders such as the USA, Japan and major EU member states.

Higher education has been free for the low income families for several generations. Student loans are readily available. It is hard to believe that such a readily solvable problem is a major source of inequality and lower growth.

Cross-country differences in total factor productivity are due to differences in the technologies that are actually used by a country and the degree in the efficiency with which these technologies are used. Differences in total factor productivity, rather than differences in the amount of human capital or physical capital per worker explain the majority of cross-country differences in per capita real incomes (Lucas 1990; Caselli 2005; Prescott 1998; Hall and Jones 1999; Jones and Romer 2010).

Differences in the skills of the individual worker or in the total stock of human capital of all workers in a country cannot explain  cross national differences in value added per worker at the industry level.

  • The USA competes with Japan for productivity leadership in many manufacturing industries.
  • The Japanese services sector productivity can be as little as a one-third of that of the USA.
  • Japanese labour productivity is almost twice Germany’s in producing automobiles and is better that Germany by a large margin for many other manufactured goods.
  • The USA is uniformly more productive in services sector labour productivity. For example, British, French and German telecom workers were 38 to 56 per cent as productive as their American counter-parts.

The USA, Japan, France, the UK and Germany all have relatively well-educated, experienced and tested labour forces. For example, the 1993 McKinsey’s study inquired into the education and skills levels of Japanese and German steel workers. Comparably skilled German steel workers were half as productive as their Japanese counterparts (Prescott and Parente 2000, 2005).

As for the source of the growing income inequality, there is a long literature dating back 25-years arguing that skill-biased technological change is increasing the returns to investing in education

Important is the OECD conclusion that inequality in terms of the rich getting richer does not harm growth. To make sure I have not misquoted them , I quote once again from their abstract, where the OECD summarises its own findings:

Drawing on harmonised data covering the OECD countries over the past 30 years, the econometric analysis suggests that income inequality has a negative and statistically significant impact on subsequent growth.

In particular, what matters most is the gap between low income households and the rest of the population.

In contrast, no evidence is found that those with high incomes pulling away from the rest of the population harms growth.

That  conclusion of the OECD  almost saves me from having to go on about how inequality has not increased in New Zealand for the last 20 years, see figure 2, and that the top 1% have not increased their share of income in recent decades  – see figure 3. The fact that the rich can get richer without harming the poor is an important conclusion that will surely not be reported by the media.

Figure 2: Gini coefficient New Zealand 1980-2015

Figure 3: Top 1% income shares, USA, New Zealand and Australia, 1970-2012

Another inconvenience for the OECD is the last major increase in Gini coefficient in New Zealand was followed by a 15 year economic firm – see figures 2 and 4.

Figure 4: Real GDP per New Zealander and Australian aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1956-2013

The NZ top 1% share has been steady at 8-9% since the mid-1990s  see figure 4; the top 1%’s share rose strongly in the USA in recent decades, from 13% in the mid-1980s to 19% in 2012.

The Occupy crowd blame everything from the global financial crisis to a bad environment on growing inequality and the growing riches of living top 1%. Such an argument has no foundation in fact in New Zealand. The last major increase in Inequality was a long time ago in New Zealand.

The OECD is also rather casual about how policies to redistribute wealth and increasing incomes. While Western Europe is diverse, as a group, the higher taxes  in the European Union reduced incentives to work. Employment as a percentage of the population has been consistently lower in Western Europe than in the USA since the 1950s, with an average employment rate gap of 10 percentage points over 1980-2007.

Large increases in taxes on income from labour since the 1970s, enhanced incentives for retire early, and the interaction of generous employment insurance with the larger skill losses among workers displaced by the greater economic turbulence since 1980 all acted to reduce both real GDP and hours worked per week per working age person by up to a third in Western Europe as compared to the USA since the 1970s (Prescott 2004, 2007; Rogerson 2006, 2008; Ohanian et al. 2008; Ljungqvist and Sargent 1998, 2007, 2008). For example, Ohanian, Rao and Rogerson 2008 in “Work and taxes: allocation of time in OECD countries” found that:

  1. A steep decline in average hours worked per adult and large variations across OECD member countries in the magnitude of this decline.
  2. Changes in labour taxes accounted for a large share of the trend differences.
  3. Countries with high tax rates devote less time to market work, but more time to home activities, such as cooking and cleaning.
  4. This reallocation of time from market work to home work is much stronger for females than for males.

Europeans pay more taxes, work fewer hours per year, have longer vacations, retire sooner, and invest less in human capital in an era in which trends in technology have significantly increased the demand for skilled workers, more innovation, more intense competition and greater entrepreneurial alertness. In The Impact of Labor Taxes on Labor Supply: An International Perspective (AEI Press, 2010) Rogerson finds that:

• a 10 percentage point increase in the tax rate on labour leads to a 10 to 15 per cent decrease in hours of work.
• Even a 5 per cent decrease in hours worked would mean a decline in labour output equating to a serious recession.
• While recessions are temporary, permanent changes in government spending patterns have long-lasting repercussions.
• Although government spending provides citizens with important benefits, such benefits must be weighed against the disincentive effects of increased labour taxes.
• Policymakers who fail to account for the decrease in labour output risk expanding government programs beyond their optimal scale.

Robert Lucas estimated in 1990 that eliminating all taxes on income from capital would increase the U.S. capital stock by about 35% and consumption by 7%.

Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, and Laurence J. Kotlikoff (2014) found that eliminating the corporate income tax completely would raise the U.S. capital stock (machines and buildings) by 23%, output by 8% and the real wages of unskilled and skilled workers each by 12%.

In summary, this one paper by the OECD, which is a working paper makes profound conclusions about taxation and economic growth that contradict a large literature based on the lack of statistical significance of coefficients in the OECD’s regressions.

More fundamentally, linking lower economic growth to inequality through credit constraints on the human capital accumulation of the lower middle class is a weak reed to hang its argument. Human capital is not a good explanation of variations in growth across time or between countries.

What happened to income inequality in New Zealand in the late 1980s is not a credible explanation for lower growth 30 years later. Lower economic growth because of greater inequality is certainly an easy problem to solve if all that is required is more action on the financing constraint on human capital accumulation.

Roger Pielke Jr.

professor, author, speaker

Great Books Guy

Reading The Classics

The Market Monetarist

Markets Matter, Money Matters...

healthcare-economist.com/

An unbiased look at today's health care issues

Plugging the Gap

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Velvet Glove, Iron Fist

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Economics in the Rear-View Mirror

Archival Artifacts from the History of Economics

Green Jihad

Your source that tells the truth about the environmentalist movement's holy war against mankind

@STILLTish. Gender Abolition

Examining Gender Identity ideology and its impact on Women's Sex based protections. Exploring how this has taken such firm root in Western societies (Cognitive & Regulatory Capture).

200-Proof Liberals

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

What Paul Gregory is Writing About

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Kids Prefer Cheese

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Offsetting Behaviour

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

JONATHAN TURLEY

Res ipsa loquitur - The thing itself speaks

single sex spaces

Single sex spaces are a question of consent

Adventures of a Tudor Nerd

Tudor History from the Wars of the Roses to the Death of Elizabeth I

Weapons and Warfare

History and Hardware of Warfare

Notes On Liberty

Spontaneous thoughts on a humble creed

CONVERSABLE ECONOMIST

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Barrie Saunders

Thoughts on public policy and the media

The Victorian Commons

Researching the House of Commons, 1832-1868

Coyote Blog

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

The History of Parliament

Blogging on parliament, politics and people, from the History of Parliament

Catallaxy Files

Australia's leading libertarian and centre-right blog

Books & Boots

reflections on books and art

Legal History Miscellany

Posts on the History of Law, Crime, and Justice

Sex, Drugs and Economics

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Vincent Geloso

Economics, History, Lots of Data and French Stuff

Climatism

Tracking Anthropogenic Climate Alarmism

Science Matters

Reading between the lines, and underneath the hype.

Point of Order

Politics and the economy

FREEcology

Libertarian environmentalism

Doc's Books

A window into Doc Freiberger's library

Newmark's Door

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Media Myth Alert

Calling out media myths

Uneasy Money

Commentary on monetary policy in the spirit of R. G. Hawtrey

%d bloggers like this: