Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong

Where Is It?

Where is my copy of Claudia Goldin and Lawrence Katz (2008), *The Race Between Education and Technology*? Did I leave it at the Faculty Club? If anybody sees it...

Why Aren't More People Going to College?

Altonji, Bharadwaj, and Lange do not know.

They say:

The anemic response of skill investment to skill premium growth | vox - Research-based policy analysis and commentary from leading economists: The earnings premium for skilled labour has increased dramatically in recent decades. Yet... Americans are not acquiring significantly greater skills in response to this change.... Since 1980, the demand for skilled labour has risen faster than the supply of skills, fuelling a steady increase in the earnings premia found for measures of skills such as schooling or cognitive test scores. The rapid rise in the skill premium represents a substantial increase in the economic incentive to acquire skills.... [B]etween 1980 and 2000 the internal rate of return for completing high school rather than dropping out after tenth grade has increased from approximately 40% to 55%.... How rapidly and how much young adults respond to this increase in the returns to skills and how this response varies across the population have important implications....

In Altonji, Bharadwaj, and Lange (2008), we... look at factors that influence skill acquisition, such as parental education and growing up in a two-parent family... make use of measures of the ease with which young adults transition from schooling into the labour market.... [O]verall the 1997 youth cohort is more skilled than the 1979 cohort... at the median... skill[s]... increased by about 6.5 percent. Is [that]... a behavioural response by youth to the widening skill premium?... [N]o.... [M]embers of the more recent cohort have significantly more educated parents than young people in 1979.... Holding parental education, race and gender, and family structure constant, the supply response to the increase in skill premia between cohorts was small: about 1% on average and about 1.5% at the median.... It seems that very large increases in skill premia are necessary to induce young workers to increase their investments in skills substantially.... This implies that, all else equal, the large degree of earnings inequality observed today is likely to persist far into the 21st century....

[T]he difference in the skills of the 1980 and 2004 youth cohorts is larger at the top of the skill distribution than at the bottom... due to the changing distribution of parental education.... [T]he changing distribution of skills in the population will exacerbate rather than counteract the trend towards increasing earnings disparities....

At this point we can only speculate as to why the response in skills to the increase in skill premia is so small... non-pecuniary costs of skill investments... liquidity constrained... myopic... other reasons... consistent with a number of studies (e.g. Kane (1994), Dynarski (2003)) that find that schooling decisions are quite sensitive to direct costs of schooling and tuition subsidies.... Cunha and Heckman (2007)... [perhaps] parental investment during early childhood shapes the potential to acquire additional skills later in life....

At this point, the question of why the supply response to the increase in the labour market returns to skill has been so small is an open one. In our opinion, it ranks among the most important empirical issues facing labour economists today.

This raises the possibility that the only easy way to reduce market inequality is to greatly increase the supply of the skilled and educated in the long run by making higher education free--which is a very dubious policy on the inequality front, because it starts with a honking huge transfer from the average taxpayer today to the relatively rich well-educated of tomorrow.

Alma Mater Blogging...

Greg Mankiw's desire to move Harvard to someplace better adapted to human life than Massachusetts was triggered by:

Greg Mankiw's Blog: Time for Harvard to Move?: The Wall Street Journal reports one of the most pernicious ideas I have heard of late: "Massachusetts legislators, demonstrating a growing resentment against the wealth of elite universities in tight economic times, are studying a plan to levy a 2.5% annual tax on the portion of college endowments that exceed $1 billion. The effort takes aim at one of the primary economic engines of the state, which is home to nine universities with endowments that surpass the $1 billion level, led by Harvard University's $35 billion cache, the nation's largest.... Supporters said the proposal would raise $1.4 billion a year. Based on the most recent size of Harvard's endowment, the university would have to shell out more than $840 million annually..."

There is an important underlying issue here with respect to America's private universities...

Let me put it this way: in 1960, the University of California--then overwhelmingly UCB and UCSF and UCLA--was about four times the size of Harvard, 5000 vs. 1200 undergraduates a year, with graduate students and faculty roughly in proportion. Clark Kerr, as president of the University of California in the 1960s, took a look at space constraints in Berkeley and Westwood, took a look at the rising population of California, took a look at increasing wealth, took a look at increasing educational attainment, took a look at the increasing attractiveness of American universities to people abroad, and conclude that the number of undergraduate students who could and would want to take full advantage of a UC education was going to grow eightfold over the next fifty years. So he decided to go all-out to clone UCB and UCLA.

And he did it.

Today we have UC Davis, UC Merced, UC Santa Barbara, UC Santa Cruz, UC Sunnydale, UC Irvine, UC Riverside, UC San Diego which together with UCB and UCLA graduate 40,000 undergraduates a year. Quality of education at UCB and UCLA has suffered a little bit as this cloning process has diverted resources away from us--but only by a very little bit. And the other UCs are damned good--with Davis and UCSD now being, I think, equal to the flagship campuses (although we don't admit it in bureaucratic system wars). And the Cal States do an impressive job as well. And the community colleges provide remarkable educational value for the money. The high administrators of the University of California starting with Clark Kerr have an extraordinary, remarkable accomplishment to look back upon. And they should be very proud--especially as they have accomplished it in the face of declining relative levels of support from the state legislature in Sacramento.

Harvard, over the same fifty-year time span... Harvard has gone from 1200 undergraduates a year to 1600, and has done so in spite of starting with a substantial endowment and receiving $15B of private charitable gifts. Harvard does a great many things well--and I am impressed by the fact that Larry Summers's presidency seems to have had the effect of creating a large brand-new science building on every block. But it is hard to think that the production function from resources to outcomes is an efficient one or something to be particularly proud of: I think presidents Pusey, Bok, Rudenstine, Summers, and Bok again were beaten by the system. At meetings of high academic administrators Berkeley Chancellor Robert Birgeneau and his ilk can hold their heads up high as proud successors to a highly capable group of administrators who made a lot of lemonade out of the lemons that they were handed, but I don't think Harvard president Faust can do the same.

Somebody last week--was it Jan de Vries? John Ellwood? Somebody else? I forget who, but it is not original to me--said that the right model for Harvard over the past century is Yugoslavia. Remember the story of the Yugoslavian socialist worker-managed firm? If you add another worker to the firm, that worker gets a pro-rata share of the firm's value added. The firm's value added has a component attributable to the firm's capital stock, a component attributable to the ideas embedded in the firm, a component attributable to the firm's market position, and a component attributable to the workers. Hire another worker, and only the last of these goes up: the first three do not, and so average compensation falls.

This means that a worker-managed firm is likely to shrink whenever it gets good news that makes it more productive--the larger is the value added due to ideas, capital, or market position, the more expensive does it become for the existing workers to replace workers who leave, let alone hire enough workers to expand. While a competitive market capitalist firm responds to good news about its productivity and value to society by increasing employment, a Yugoslavian-model market socialist firm responds to good news about its productivity and value to society by shrinking. On this analysis, the very success of Harvard over the past two generations together with its degree of worker management has created enormous internal pressures not to expand, the better to share out the surplus among the existing stakeholders.

If this story of Harvard-over-the-past-two-generations-as-the-socialist-Yugoslavia is correct, then a bunch of hard questions to which I do not know the answers are raised about:

• The judgment of those who have tried to satisfy their charitable impulses by giving $15B to my alma mater over the past two generations.
• The proper incentives that the government should try to present to the institution--and to those who might try to satisfy their charitable impulses in the future by adding to its endowment.
• The responsibility of alumni like myself to try to influence the future governance of the institution: corporation members like Bob Reischauer know what is going on at least as well as I do, but seem to have been unable to move the institution.
• The question of how Harvard should expand if indeed it should expand: it doesn't seem to be nearly as good as the small liberal arts colleges or even its rivals Yale and Princeton at undergraduate education (I did very well, but only because I quickly found two places--Social Studies in Hilles basement, and the graduate economics program--where Harvard was, effectively, a small college); the medical school and the biomedical complex that surrounds it appears to do very well indeed as research institutions; the public policy school seems to have been an experiment worth trying that did not fulfill Derek Bok's hopes, but that I cannot fully evaluate; few of the many people I know who went to the law school say many good words about it; et cetera.

Greg Mankiw Wants to Move Harvard

Greg Mankiw wants to move Harvard to someplace better adapted to human life than Massachusetts:

Here is what I would consider.... Harvard could create a second campus in another state. Call it Harvard South. (Put it in a better climate than Boston, and I would be one of the first faculty to volunteer for the move.) Transfer much of the endowment to Harvard South. Support Harvard North by slowly selling off land in Massachusetts. Eventually, make Harvard South the main campus, and Harvard North the satellite. If Massachusetts state lawmakers remain hostile, close Harvard North down entirely.... I have often wondered what the efficient scale of a university is and, in particular, whether it would be better to create a second Harvard with the university's wealth than to expand the first one. Maybe the Massachusetts state legislature will give the powers-that-be at Harvard an incentive to consider more radical expansion plans.

There may be a Pareto-improvement possible here. Extrapolating from how much it cost to get Tom Campbell here at Berkeley formally called the Bank of America Dean of the Haas School of Business, I am confident that it would cost relatively little--perhaps 5% of Harvard's current endowment--to get us to be willing to rename this campus the Harvard University of California at Berkeley. And while I haven't talked to department chair Hermalin or personnel chair Shannon about this, I do think their judgment would be that adverse selection problems are low enough and Harvard's standards in economics high enough that we would be willing to issue a blanket offer to its faculty (but this would not, I understand, be the case in some other fields, computer science and chemistry for example). For Greg I'd even be willing to give up my office, with its $10M view of the Golden Gate, San Francisco, and its bay from its perch 100 feet above Berkeley's faculty glade. (Although if he wants both the west and the south view, he would have to strike a deal with Maury Obstfeld.)

There is one important proviso. Harvard's administrators--everyone who works in Massachusetts Hall, University Hall, and whatever that atrocity on the south side of Harvard Square is called--would have to stay behind. Even if we had not been certain of this point before, this month's Harvard ad-hoc committee personnel decisions have fixed our resolve. I had always thought that "when they heard the news, they couldn't stop laughing" was hyperbole. But it took John Quigley five full minutes before he could say an intelligible word...

Greg Anrig on Education Reform

Greg Anrig writes:

An Idea Whose Time Has Gone: The conservative infatuation with vouchers did contribute to one genuine accomplishment. The past thirty years have been a period of enormous innovation in American education.... In addition to charter schools, all kinds of strategies have taken root: public school choice, new approaches to standards and accountability, magnet schools, and open enrollment plans that allow low-income city kids to attend suburban public schools and participate in various curriculum-based experiments. To the extent that the threat of vouchers represented a "nuclear option" that educators would do anything to avoid, the voucher movement helped to prompt broader but less drastic reforms that offer parents and students greater educational choices.

Along the way, some success stories have emerged... strategies that combine school choice initiatives like magnet and charter schools with policies to integrate poor and middle-class students. Wake County, North Carolina, for instance, introduced a policy in 2000 mandating that no school could have more than 40 percent of its students eligible for free or reduced-price lunches. Because this program makes use of choice and incentives like magnet schools to integrate poor and middle-class kids, it avoids the political hazards of compulsory busing. So far, the results have been impressive. In 2006, 60.5 percent of low-income students in Wake County passed the high school End of Course exams, compared to 43 percent of low-income students in a nearby county of a comparable size.

Of course, the inherent limit to this idea is that many urban school districts are so uniformly poor that there are few, if any, middle-class communities with schools that low-income kids can attend. One way to get around this problem would be to amend the No Child Left Behind Act to give students in failing schools the ability to attend a school outside their own district.... [V]oucher proponents... motivated by a desire to help disadvantaged kids, and not merely an ideological urge to weaken public institutions... [should put] their prodigious energies and money behind choice programs like these that actually work.

Student Loans and the Mortgage Crisis

Pete Davis watches the congress

Student Loans May Be Impacted by the Mortgage Crisis | Capital Gains and Games: Just as students are about to apply for their loans for next fall, many lenders have stopped making student loans. This week, two of the largest, Citicorp and Bank of America, pulled out. Higher educational institutions are rapidly switching back to direct loans from the government, but the Department of Education may be swamped despite the fact that no student has been denied a loan yet and despite DOE's claims that it's ready to make loans that private lenders won't.

Sallie Mae's CEO Albert Lord wrote two days ago... "we can only meet the enormous student credit demands we are seeing at Sallie Mae if there is a near-term, system-wide liquidity solution." In other words, Sallie Mae's CEO called for a government bailout.

Yesterday, that's just what the House of Representatives passed in H.R.5715 by an overwhelming 383-27. The bill expanded the size and availability of student loans, and it made more explicit that the Department of Education, operating through state guarantee agencies, would operate as a lender of last resort. Senator Kennedy (D-MA) has proposed a similar bill, S.2815, which the Senate may take up soon. President Bush issued a Statement of Administration Policy (SAP) on H.R.5715, which promised students that they would get their loans and which promised to work work with Congress if that became necessary.

The House Education and Labor Committee hearing on March 16th and the Senate Health, Education, Labor, and Pension Committee hearing on March 17th offered detailed testimony on the situation, as not a crisis yet, but which could quickly become one in the future.

What's behind all of this?

First, the mortgage crisis has driven investors away from securitized assets, including student loans. That has driven up the cost of financing student loans beyond the interest income and fees from those loans. Second, last year, the law on student loans was changed, effectively cutting the federal subsidy in half. Third, a pitched battle has been fought mostly between Republicans and Democrats over who should make student loans. When President Clinton came to office in early 1993, he was able to establish direct lending from the taxpayers to students, but just about every student loan bill until last year's pared back direct lending in favor of private lending.

Now that the mortgage crisis has spilled over into student lending and private lenders are pulling, you have to ask yourself, "Why are we going through this?" Economists generally prefer market mechanisms to government programs, but there are market imperfections and externalities that can tip that balance back toward government programs. We got to this point after decades of debate over that issue with regard to student loans. Now that the mortgage crisis threatens, we will see if it ends private lending to students over the summer.

Right-Wing Message Discipline

McMegan writes:

Megan McArdle (October 16, 2007) - I take it all back: A conservative publication, which I will not name, just spiked a book review because I said that the Laffer Curve didn't apply at American levels of taxation, even while otherwise expressing my vast displeasure with the (liberal) economic notions of the book I was reviewing. This isn't me looking for an alternative explanation for the spiking of a bad review: the literary editor accepted it, edited it, and then three hours later told me it couldn't be published because it violated their editorial line on taxation.

I suppose I ought to have known, but I didn't. Go ahead liberals, pile on: you told me so...

McMegan won't name names. She regards herself as still under some form of right-wing message discipline. So we are left in ignorance as to which conservative publications (a) want to serve as platforms to present the views of smart (albeit conservative) people, and which (b) regard their primary mission as telling lies to advance the power interests of Republican politicians.

I'm going to assign all conservative publications to (b) in the absence of anything to the contrary. Anybody have any conservative publications they want to whitelist--to move from (b) to (a)?

Why oh why can't we have a better press corps?

---

UPDATE: McMegan concludes:

The Laffer Curve and the supply siders pushing it seem to be the teacher's unions of the right.

Funny how I have never heard of a liberal publication spiking a piece because it was insufficiently friendly to teachers' unions or trial lawyers or AARP. Don't I remember seeing a lot of things in liberal publications about how school systems are overbureaucratized, in large part because of the unions?

It is true that I have seen a lot of right-wing hyenas but haven't seen many liberals attack teachers for being overpaid and underworked. Liberals are more likely to take a line like this:

Pay Teachers More Money: Without improving the average quality of our teachers, there is little hope of improving the system... teacher quality has declined over time... ironically... [because of] reduced discrimination against women. Fifty years ago, talented, educated women had few options other than teaching, and the schools were filled with highly qualified and able teachers. Today, college-educated women have moved into other occupations....

This is no surprise. Teachers are not paid very well, and many talented potential teachers have other options.... Why are teachers so important? Since most education in this country takes place in classrooms where there are many children, disruption by one child imposes penalties on other children in the class. The evidence suggests that child behavior is very sensitive to teacher quality....

[S]chools are failing badly for some subgroups... education has been demonstrated conclusively to be very important both for a country's economic growth and for raising the wages of individual citizens. Each year of schooling is associated with about a 10 percent increase in subsequent annual earnings....

[T]he reality is that the public school system will be with us for years to come, and it is important to make that system stronger.... To improve our schools in the 21st century, it is first necessary to attract more high-quality teachers...

That's the liberal line--that teachers need more money. But that line is not just a liberal line. It is a reality-based line. The quote is from Eddie Lazear, Hoover Institution Senior Fellow and Chair of President Bush's Council of Economic Advisers. (Eddie is also strongly, strongly in favor of vouchers, educational competition, and parental voting-with-the-feet--things that liberals tend to be more skeptical of.)

Hoisted from the Archives: First Lessons from Kindergarten

Mark Thoma reminds me of this, from September 1995. Little has changed:

First Lessons from Kindergarten: by Brad DeLong and Ann Marie Marciarille

Brad DeLong and Ann Marie Marciarille are parents living in northern California.

Our five-year-old started kindergarten last fall.

He diligently does his homework at night, this week cutting blue objects and rectangular objects out of glossy catalogs with his very blunt scissors. The two-year-old feels that she is missing something, demands to go to kindergarten instead of nursery school, and insists that she be allowed to do "home'rk" also. The kindergarten teachers at this local public school are enthusiastic, friendly, patient, professional, and extraordinarily good at guiding and focusing the attention of the five-year-olds.

In December the class went to a special--shortened for kindergartners--version of the Nutcracker. In October the class went on a field trip to a pumpkin patch. In September there was a school-wide picnic, at which he won a cake decorated with small plastic dinosaurs. And the week before that we arrived at lunchtime to pick him up, and found the whole elementary school on the blacktop, yelling at the top of their lungs as they watched a Chinese Lion Dance. In a year he will have the option of starting a French or Spanish class.

It is a very good kindergarten. We are very happy with it.

But the school building is thirty years old, and does not look as though it has seen any work since it was built during the baby boom, thirty years ago. Class sizes are pushing thirty. Half of the kindergartners are "early birds"--coming an hour early--and half are "late birds" so that there is at least some time in the day with a lower student-faculty ratio. The school district budget has no money to pay for new playground equipment, for books for the library, for hot lunches, for aides to help offset the large class sizes--or indeed for foreign language classes or Chinese Lion Dances.

Yet the elementary school does have new books in its library and teacher aides in its classrooms (at least some of the time), the students do have the opportunity to take foreign language classes, and the kindergarten playground will in a year or two have new playground equipment. So where does the money come from? From the parents and from the town. From T.J. Maxx, Safeway, and many other businesses that wish to be good citizens (and to attract business) and so offer the parents' club a percentage back of dollars spent by members. Each year the Educational Foundation raises money to top off the school budget. The town has repeatedly voted for bonds and overrides for the schools.

This response is what makes--or perhaps made--America great. As the state government in Sacramento headed by the Deukmejians and the Wilsons has tightened the screws on its contribution to the education budget over the past decade, the parents and the community have recognized that they have a strong and immediate interest in making sure that the schools remain excellent: my kid cannot get a good public-school education unless your kid does too.

This is the spirit that amazed Alexis de Tocqueville when he travelled to America early in the nineteenth century. In France, Tocqueville wrote, patriotism was a feeling of pride in the power and glory of the monarch or the state as the symbolic personification of the country. In America, Tocqueville wrote, "attachment to country... is more rational... more fruitful and long-lasting." It springs from everyone's recognition of "the influence which the well-being of his country has upon his own." Because your own happiness depends on the well-being of others--your neighbors, your town, your county, your state, your country--you work to advance the public interest because it is closely connected to your own private interest. Five out of every six parents at the elementary school contribute to the local Educational Foundation. And because you have invested your time and energy in the common wealth, it becomes "in part [your] own work.... [E]veryone... takes an active part in the government.... [and so] the citizen looks upon the fortune of the public as his own.... As the American participates in all that is done in his country, he thinks himself obliged to defend whatever may be censured in it..."

Yet look beyond the valley in which we live, and this spirit--that Tocqueville so admired, and that he thought in 1835 would make America the greatest country on earth--is hard to find. For why is it that a town's parents must band together and contribute to the Educational Foundation to top off an inadequate elementary school budget? In 1969 California was perhaps tenth among states in dollars spent per pupil; today it is perhaps fortieth.

The per-worker wealth of the nation has grown by twenty-two percent since 1969; in 1969 there were more than twelve children in primary and secondary school for every twenty workers, while today there are barely seven children at school for every twenty workers. If we spent the same share of our economic resources on primary and secondary education today as we as a nation spent in 1969, we would be spending some $7,100 a year per pupil on education. Instead, in California we spend what? $4,840--a rich state spending sixteen percent below the national average, and only two-thirds of what we "should" be spending if primary and secondary education got the same share of our national resources now as they did then.

So what happens in communities where the average household annual income is not in six figures, where parents can afford to do less, and where the bonds of community lack the strength that makes five out of six voluntarily contribute their time and money to the school system? The hope would be that the government acts to reinforce public spirit and public concern in communities where it is weak, and in communities that are poor. The reality is that we as a country no longer care enough about one another's children, and that politics in the United States has taken a course that turns the stomach of even a George Will--who denounces current plans for welfare reform on the grounds that "no child [benefits]... from becoming collateral damage in a bombardment of severities targeted at adults who may or may not deserve more severe treatment."

We wish that we lived in a United States that recognized that the welfare of each of our children depends on the welfare of one another's children. In 2030 our now five-year-old will be forty, our now two-year-old will be thirty-seven. We will spare no expense of energy or money to give them the best upbringing we can. But there is one thing that we wish we could give them, but that we cannot buy or do by ourselves: we wish that the others who will be forty or thirty-seven in 2030, and who will make up the America in which our children will live next century, have schools to teach them to read and parents with the financial resources to raise them to adulthood. Our children will be richer and happier if they live in an America where others are rich, happy, and highly-skilled than if they live in an America where others are poor, frustrated, and semi-literate.

It is not that we are unusually public spirited. It is just that when we look at our children we understand where our self-interest truly lies.

So we are looking for a political movement that will dare to say that it is in each of our self-interest to pay a little bit more in taxes, and have us all invest in everything that the next generation now growing up will need--in science, in infrastructure, in health and education, and most urgently in the one-quarter of the nation's children whose households fall below the poverty line.

Why is it so hard to find one?

Linda Perlstein Talks About Educational Reform Choices

From USA Today:

'Tested' examines difficult choices - USATODAY.com: Linda Perlstein, a former Washington Post reporter, wanted to see the effects firsthand, so she spent an academic year inside a high-poverty elementary school in Annapolis, Md. The result is Tested: One American School Struggles to Make the Grade. USA TODAY's Greg Toppo talks with her about testing:

Q: You spent a year getting to know kids at Tyler Heights Elementary School. How did this change your outlook on their education and tests?

A: I don't have a problem with testing children. I have a problem with thinking test results tell you most of what you need to know. They simply don't — these tests are often very narrow instruments. Where reforms have forced educators to notice children who might otherwise have been neglected, I give credit. But I wrote this book because school reforms intended to abolish a two-class system were in some ways exacerbating it. There's one world where students pass the test as a matter of course and get to write poems, and another where children write paragraphs about poems. Meanwhile, there's supposed to be a movement in American schools to educate each child as an individual. The teachers at Tyler Heights work mightily to do that, but they have to get everybody to the same place in the same amount of time, and follow daily curriculum agendas handed down from above.

Q: President Bush says the "soft bigotry of low expectations" preceded his school reforms, but you say condemning kids to a "rudimentary education" is just as bad. What's so rudimentary about the education at Tyler Heights? And what about similar schools that keep a rich curriculum while doing well on tests?

A: Tyler Heights kids in some ways are very fortunate: Even though many are poor, their well-off district provides them a safe, clean building, plenty of learning tools and a smart, hard-working staff who cares immensely about them. But those educators feel constrained because of rigid curriculum strictures, the low skills of many kids and the pressure to excel on the test. So a teacher suspects her third-graders might be asked on the test to write a paragraph enumerating the elements of a poem. The kids can't get it right. Does she have them write that paragraph over and over until they do, or does she let them actually write poems? The latter would be more engaging and, in the long run, instructive, but the school might calculate that drilling is the more direct, reliable line between two points. Or that science experiments, since they won't be on the test, aren't the best use of a too-short school day. These aren't choices I agree with, but I understand why they're made. The schools with rich curricula exist here and there, most likely with daring staffs and flexible school districts that give educators plenty of room to innovate.

Q: In one memorable scene, a district supervisor watches kindergartners in gym class waft a parachute into the air and scamper beneath it. She says of the teacher, "I can't see his goal." It seems absurd, but does she have a point?

A: No. The silliest thing I have seen in my decade of education reporting is the insistence that every "learning outcome" be posted — the more jargon, the better. Do 5-year-olds need to know that they are tossing balls onto a parachute and running underneath to "demonstrate ways to send and project an object using a variety of body parts and implements" and "move safely in personal and general space"? Can't they just think they're having fun?

Q: Reading your account of a teacher dropping nonsense words into lessons to prep for their appearance on a vital speed-reading test, I thought about Thoreau's warning against becoming "the tools of our tools." What is wrong with this picture?

A: The teacher wanted her kindergartners to be prepared for their assessment, which makes sense. Kids should learn to sound out letter combinations whether or not they make actual words. But she would have preferred to use that time teaching her kids real vocabulary.

Q: I won't give away the ending, but Tyler Heights seems a different place after the big state test is over — science fairs, creative writing and field trips return. Are tests really calling the shots?

A: After I left Tyler Heights, the principal eased up a bit on her "laser-sharp focus." Activities were spread more evenly throughout the year, third-graders wrote poems, there were more attempts at critical thinking. Compared to the previous year, the percentage of kids passing the state test decreased in more categories than it increased. But I don't think the teachers would tell you the students learned any less.

Equality of Opportunity Is a Lie

Tyler Cowen says I should start cracking the whip on the Fourteen-Year-Old: it's never too early to get her practicing SAT writing questions:

Marginal Revolution: An early start in life is a good start: A'la James Heckman, the importance of early life for economic outcomes seems only to grow:

Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime?  We answer this question within a model that features idiosyncratic shocks to human capital, estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth -- features which are chosen to match observed properties of earnings dynamics by cohorts.  We find that as of age 20, differences in initial conditions account for more of the variation in lifetime utility, lifetime earnings and lifetime wealth than do differences in shocks received over the lifetime.  Among initial conditions, variation in initial human capital is substantially more important than variation in learning ability or initial wealth for determining how an agent fares in life.  An increase in an agent's human capital affects expected lifetime utility by raising an agent's expected earnings profile, whereas an increase in learning ability affects expected utility by producing a steeper expected earnings profile....

In other words, treat your kids well, invest in them, and realize that determinism is not altogether crazy...

Michael O'Hare Praises Robert Frank's Economic Naturalist

Michael O'Hare writes:

The Reality-Based Community: Serve fewer courses to nourish more; let the diners in the kitchen and give them aprons.: Bob Frank exhibits the factor most highly correlated with student evaluations of teaching, which is manifest enthusiasm for his subject matter.... Modern psychology has boiled down being really smart to a couple of core traits. One is knowing a lot about a lot of different things; the other is being wired up so these different things jump out of their usual cognitive boxes and connect in unusual ways. Frank is smart in this way, so his exploration connected his experience with learning languages and his general education knowledge of why male and female albatrosses look alike while bull and cow seals don't.

The result is three very solid insights, consistent with a lot of what others are discovering about how people learn. The first is the difference between (i) recall and repetition of a recipe, formula or fact on cue and (ii) really knowing something. The second is the principle articulated by Bob Behn thus: "If you're teaching someone to use a computer, you should never touch the computer." The third is the difference between the few important basic principles that experts use all the time without realizing it, and the many abstruse and frontier-pushing results they get with them.

Put these together and you get a teaching model with:

1. A few big ideas, looked at from many directions and dressed up (but not hidden) in many guises.
2. Students getting their hands dirty using these ideas to solve problems they know they have (this is always better than letting the ideas look like new problems they didn't want).
3. Displacement of the concept of being right by the concept of being useful (Nelson Goodman explains this in Ways of Worldmaking).

The central exercise of such a course is to assign the students the role of naturalist (this is where the birds and seals come in): Find a situation that surprises you, that you can understand better (or even explain completely) using the core concepts of economics. Your explanation doesn't have to be complete, or even right, but it has to be interesting and reasonable. Five hundred words, once in the middle of the semester and again at the end.

I have generalized his exercise this spring in my introduction to public policy course to a "policy naturalist" assignment with excellent results (though I'm not sure I did such a good job of distilling the course down to fewer big ideas and less showoffy arcana), and I intend to do the same next fall in an introductory probability and statistics course. This model really has legs.

The result of Bob's experiment is, obviously, a drawer full of these exercises, which he has assembled into a book... The Economic Naturalist, and if you're not putting on your coat to repair immediately to your local physical bookstore, or mousing over to your favorite online merchant to buy it, you are reading the wrong blog.

Puzzling College Enrollment Rate

Greg Ip wrote, a while ago:

Washington Wire - WSJ.com: Portion of High-School Grads Heading to College Shrinks: A welcome surge in the share of high-school graduates going to college has come to a halt, at least for now. First, some background: College graduates earn more than high-school graduates, and that premium is a lot bigger than it was 20 years ago. There are numerous reasons but one might be that after rising for most of the postwar period, the share of the work force with college degrees stopped growing, constricting supply just as demand for highly skilled workers took off.

Earlier this decade, there were signs of a shift. Responding perhaps to both the college wage premium and the weak job market, the proportion of high-school students who enrolled in college the fall after they graduated rose from 61.7% in 2001 to 68.6% in 2005, the highest since data began in 1959. To be sure, many of those enrollees never finished college but on balance it suggested the supply of college graduates was about to head higher. But last fall, the college enrollment rate dropped back to 65.8%, the Bureau of Labor Statistics reported this week.

Exactly why is unclear. The tighter labor market ought to have encouraged some kids to take jobs instead of go to college. But the report showed just 46% of high-school graduates were working last fall, down from 49.3% the prior year. The proportion unemployed but looking for work rose to 13.7% from 11.4%, and the proportion neither working, looking for work nor in college also rose, to 12.3% from 9.9%...

It's not just that the college premium is bigger than it was a generation ago: it's roughly 90% compared to 30% a generation ago. A lot more people should be going to college, for any economist's definition of "should."

Underbelly Praises Sam Bowles

It writes:

Underbelly: "If We Knew How to Do That,
We Would Not Be Poor": While others are sorting out the question whether neoclassic econ is a Mafia (link, link), allow me to share this anecdote copped from one of the most interesting and original microeconomics textbooks I’ve ever seen:

Like the overnight train that left me in an empty field some distance from the settlement, the process of economic development has for the most part bypassed the two hundred or so families that make up the village of Palanpur. They have remained poor, even by Indian standards: less than a third of the adults are literate, and most have endured the loss of a child to malnutrition or to illnesses that are long forgotten in other parts of the world. But for the occasional wristwatch, bicycle, or irrigation pump, Palanpur appears to be a timeless backwater, untouched by India’s cutting edge software industry and booming agricultural regions. Seeking to understand why, I approached a sharecropper and his three daughters weeding a small plot. The conversation eventually turned to the fact that Palanpur farmers sow their winter crops several weeks after the date at which yields would be maximized. The farmers do not doubt that earlier planting would give them larger harvests, but no one the farmer explained, is willing to be the first to plant, as the seeds on any lone plot would be quickly eaten by birds. I asked if a large group of farmers, perhaps relatives, had ever agreed to sow earlier, all planting on the same day to minimize losses. “If we knew how to do that,” he said, looking up from his hoe at me, “we would not be poor.”

--Samuel Bowles, Microeconomics: Behavior, Institutions, and Evolution, pp. 24-25 (Princeton Paperback ed. 2004)

There must be 100 books entitled “Microeconomics”—-a thousand? This one is so far out of the conventional mode that it might count as a violation of the British Trade Descriptions Act. It’s far closer to what might have passed as “Political Economy”—-Economics before the Mafia took over. Lots more attention to the structure of economies than you would expect in a standard Micro intro. Yet in detail (at the micro level?) it is actually fairly conventional stuff: all the individual items appear to come out of the standard toolbox. The unconventional ordering gives them a fresh and invigorating spin.

Robert Waldmann on Education and Growth

Robert Waldmann writes:

Robert's Stochastic thoughts: Mark Kleiman writes... that there are [extra] social returns [from investing more in education] due to knowledge spillovers, the contribution of an educated electorate to democracy, and reduced inequality due to supply and demand for degrees.... However, to the extent that education works as a signal of something (intelligence, willingness to defer consumption and, maybe, other gratification or willingness and ability to sit quietly and submit to authority) it has private returns which aren't social returns.

Oddly this happens to be almost exactly what I wrote in my one and only newspaper column (in Il Corriere della Sera).

He reaches an inconclusion, not knowing it expansion of schooling would be socially beneficial.

I actually went on and got to an a conclusion. I agree that it is very hard to tell based on theory or micro data. Sad to say, this leaves us with crude macro data on enrollment and welfare.... [N]o country, state or other political entity has ever spent too much on public education (I admit that the case for university level education is weaker than for secondary and especially primary). The countries with bizarrely high enrollment given current income are well known growth miracles (Taiwan. Singapore and especially South Korea). The first states to have high enrollment in high school (midwest in the 19th century) went on to become relatively much richer than they had been (kids in New England were lured off to the then high tech textile mills and New England suffered relative economic decline until the mills went South, kids studied and they got going on the new high tech (the Reagan defense buildup helped a lot too)).

Crude -- sure. Too crude for someone who doesn't depend on such data to get publications -- yeah guess so. Enough to convince me that more money should be shoved into education -- hey a flipped coin that comes up either heads or tails would be enough to convince me.

Take Education as the Key Link!

Tyler Cowen accuses me of being "too quick" to resort to the Marshallian scissors in defending Goldin-Katz "inequality the result of too few people going to college" against Becker-Murphy "inequality the result of wonderful technological progress." How can an economist be too quick to resort to the Marshallian scissors--i.e., supply and demand? As J.R. MacCulloch said in the early 19th century:

It is very simple to turn a parrot into a tolerable political economist. All you must do is to teach it to say, "Supply and demand! Supply and demand!"

Apparently, "Pieces of eight!" and "Yo, ho, ho, and a bottle of rum!" are optional.

Here's Tyler:

Marginal Revolution: Education as the critical problem behind current inequality: Here is an excerpt from my New York Times column today:

The return for a college education, in percentage terms, is now about what it was in America’s Gilded Age in the late 19th century; this drives the current scramble to get into top colleges and universities.  In contrast, from 1915 to 1950, the relative return for education fell, mostly because more new college graduates competed for a relatively few top jobs.... Goldin and Katz portray a kind of race. Improvements in technology have raised the gains for those with enough skills to handle complex jobs.  The resulting inequalities are bid back down only as more people receive more education and move up the wage ladder.

Income distribution thus depends on the balance between technological progress and access to college and postgraduate study. The problem... is that American lower education does not prepare enough people to receive gains from American higher education. Bottlenecks currently keep more individuals from improving their education...

Note that education is a fundamental issue behind the kinds of inequality we should worry about most, namely the failure of many poor people to do better over time.... In a dynamic era does educational access have much of a chance of keeping up with technological improvement?

The answer is "Yes." 1915-1950 was a time of extraordinary technological dynamism. And it does not seem to be the case that lousy public schools diminish the returns to higher education. Lousy schools lead people not to pursue further education, they don't seem to make further education unuseful. As Tyler says:

the data (see David Card's Econometrica 2001 piece, plus the work of James Heckman) still find relatively high returns to additional education...

And this seems to be as true for those who have no college as for those with some college and those with B.A. degrees: it seems that there is a 7% to 10% real return on investments in education, including as a cost of the investment the money you don't earn because you are in school rather than working, no matter how much education you have. (Some disciplinary Ph.D. programs excepted, of course.)

One additional point: the "current scramble to get into top colleges and universities" is the result of a large increase in the pool applying--300 million Americans rather than 200 million, plus a huge increase in foreigners who can afford American college--coupled with a failure of the "name" colleges to add slots for students. Demand for places at the top 50 name colleges has outrun supply, demand for places at colleges has not.

Clark Kerr saw this coming fifty years ago: that Berkeley-the-city was happy to benefit from surrounding Berkeley-the-university, but that Berkeley could not grow as fast as California would. Hence his attempt to make "University of California" the brand. To this day my stationery lists all the UC campuses: Berkeley, Davis, Irvine, Los Angeles, Merced, Riverside, San Francisco, San Diego, Santa Barbara, Santa Cruz, and, of course, Sunnydale[1]. (And we professors at the older campuses resist this common branding: we teach at "Cal" or "Berkeley" and our colleagues in Westwood teach at "UCLA" rather than at "UC.")

And with that, it's time for graduation.

---

[1] University of California at Sunnydale is, of course, a special case with a faculty and student body with some unique qualifications. It is the sibling school to the well-known Miskatonic University in Arkham, Massachusetts.

Research Continues on the Stupidity Rays Emanating from the American Enterprise Institute...

Only Shrillblog can deal properly with American Enterprise Institute economist Kevin Hassett's declaration that the Russian economy is outperforming America's--because, you see, dictatorships like Vladimir Putin's "are not hamstrung by the preferences of voters for, say, a pervasive welfare state."

Research continues on just what kind of rays emanate from 1150 17th Street that make dumb people dumber, and smart people dumb. The latest volunteers were the brilliant Kevin Murphy and Gary Becker, who were strapped into a test capsule that was sent in a close flyby by the AEI. This is what emerged:

The Upside of Income Inequality: This brings us to our punch line. Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavorable development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applica­ble to human capital as well as to physical capital. The initial impact of higher returns to human capital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to investments in education and other human capital...

In their normal state, Kevin and Gary would say that there are two possible causes of rapid growth in skills and education premiums: demand and supply. If it is demand--if technological progress accelerates so that it outstrips the previously-expected growth path, and if education and skills are strongly complementary with technology (as we believe them to be), the education and skills premiums would increase as the productivity of the American economy grew rapidly. This would be good news.

If it is supply--if for some reason the share of Americans receiving educations and gaining skills falls below previously-expected trends, and no longer keeps pace with the normal advance of technology, then the education and skills premiums would increase as the productivity of the American economy grew less rapidly than had been expected. This would be bad news.

We can, Murphy and Becker would say, tell the difference. If the rise in inequality over the past generation is due to good news, we would expect the share of Americans going to college to advance faster than previous historical trends and we would expect overall economy-wide productivity growth over the past generation to have been faster than usual. If the rise in inequality over the past generation is due to bad news, we would expect the share of Americans going to college to fall short of normal trends, and we would expect economy-wide productivity growth to have been slower than normal.

And guess what? over the past generation--even taking into account the very good decade since 1996--productivity growth has been slow, and the share of Americans going to college has not risen rapidly. On the quantity-of-education side, the news is not good:

[W]hy haven’t more high school graduates gone on to a college education when the benefits are so apparent? Why don’t more of those who go to college finish a four-year degree? (Only about half do so.) And why has the proportion of American youth who drop out of high school, especially African-American and Hispanic males, remained fairly constant? The answers to these and related questions lie partly in the breakdown of the American family, and the resulting low skill levels acquired by many children in elementary and secondary school—-particularly individuals from broken households.... Most high school dropouts certainly appear to be seriously deficient in the noncognitive skills that would enable them to take advantage of the higher rates of return to education and other human capital...

And yet this passage is followed by the conclusion:

For many, the solution to an increase in inequality is to make the tax structure more progressive—-raise taxes on high-income households and reduce taxes on low-income households.... A more sensible policy is to... encourage more human capital investment. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by dis­couraging investments in its most productive and precious form of capital—-human capital.

Becker and Murphy thus argue, in the space of three paragraphs, that (a) increases in the net return to education caused by spreading inequality generated by rising pretax wage differentials won't lead to increases in educational attainment, but (b) decreases in the net return to education caused by reducing inequality through progressive taxation will lead to decreases in educational attainment.

All are urged to remain far from 1150 17th Street until the mechanism of these effects is better understood.

Congestion Pricing in Manhattan

Andrew Samwick applauds plans for congestion pricing in Manhattan:

Vox Baby: Congestion Pricing in Manhattan: I applaud Mayor Bloomberg for proposing congestion pricing in Manhattan as part of his Earth Day initiatives, patterned after a similar system in London. From The New York Times on Sunday:

The proposal that is sure to attract the most attention, and possibly objections, is one to impose the $8 fee on car drivers, and $21 for truck operators, to drive in Manhattan south of 86th Street. The mayor said congestion on the city’s streets is the source of many of the city’s health, environmental and economic problems.“We can’t talk about reducing air pollution without talking about congestion,” he said. “As our city continues to grow, the cost of congestion to our health, to our economy and to our environment are only going to get worse,” he said. “The question is not whether we want to pay, but how do we want to pay — with an increased asthma rate, with more greenhouse gases, with more wasted time, lost business and higher prices. Or do we charge a modest fee to encourage more people to take mass transit.”

The fee the mayor is proposing would only be imposed during the week, between 6 a.m. and 6 p.m.. And motorists driving the major highways along Manhattan’s east and west sides would not be fined, so it would be possible to go from Brooklyn to Harlem along Franklin D. Roosevelt Drive without entering the zone. The article contains other information about the implementation that suggest that it has been reasonably well thought out. But this doesn't stop the critics from making a raft of self-serving claims. Let's take a look at a few:

State Assemblyman Richard Brodsky said he opposed the mayor’s proposal for a congestion fee because it is a regressive tax. “The middle class and the poor will not be able to pay these fees and the rich will,” said Mr. Brodsky, who is chairman of a committee that oversees the Metropolitan Transportation Authority. “There are a lot of courageous things in the mayor’s package, but this one is not very well thought out.”

According to this logic, all prices for services not linked to income are regressive, since the rich can more easily pay them than the poor. It might technically be true, but it isn't particularly helpful. Besides, when I go to Manhattan, I see the middle class and the poor on the subways and buses, not their own cars.

Here's some more, of the more nakedly self-serving variety:

Clayton Boyce, a spokesman for the American Trucking Association, a national industry group, told The Associated Press, “It will be a real problem for operations for trucking companies and shippers, including all the retailers in Manhattan, which is substantial. And all the people who get FedEx and UPS deliveries will have problems and will bear extra expense, so we definitely see problems with it,” he said.

It's time to give Mr. Boyce a refresher course in microeconomics. Start by considering what his answer might have been last week to the question, "What is the biggest problem your industry faces in providing excellent service to lower Manhattan?" Based on what I've seen on those streets, my answer would have been "congestion." So the mayor has proposed to tax the thing that has been encumbering the trucking industry, and its spokesman is complaining because his clients will need to pay the tax in proportion to the congestion they cause. Think of it by the numbers. How many packages are on the typical FedEx truck in Manhattan? If it were 210, then the extra expense would be a dime per package. That's trivial. How does $21 compare to the total value of each truck's cargo in a given day? It has to be tiny. And look at what the FedEx truck drivers get in return--fewer passenger cars clogging up the city streets where they need to make pickups and deliveries. They waste less time and less gas. It doesn't take much abatement of that wasted time and gas to make back the $21 per truck. The trucking industry should be this proposal's biggest supporters.

Note to Self: "Ability" and the Return to Education...

To my knowledge, Orley Ashenfelter and Ceci Rouse http://www.mitpressjournals.org/doi/pdfplus/10.1162/003355398555577 are still state-of-the-art in investigating whether the returns to education diminish with "ability." They find that at least at current levels of education they do not: the returns to those of relatively low "ability" of an additional year of education appear to be at least as high as to those of high "ability"...

Is there anything to show that there is any gender-ethnicity-"ability"-education cell in the American distribution that would not find its life-chances materially and significantly boosted if we could somehow get them an extra year of education?

Preliminary Inequality Reading List

A Preliminary Inequality Reading List:

Thomas Piketty and Emmanuel Saez (2004), "Income Inequality in the United States, 1913-2002" http://elsa.berkeley.edu/~saez/piketty-saezOUP04US.pdf

Samuel Bowles and Herbert Gintis (2002), "The Inheritance of Inequality" http://www.umass.edu/preferen/gintis/intergen.pdf

Lisa Barrow and Cecilia Rouse (2005), "Does College Still Pay?" http://www.bepress.com/cgi/viewcontent. cgi?article=1097&context=ev

Paul Krugman (1993), "The Rich, the Right, and the Facts" http://www.pkarchive.org/economy/therich.html

Paul Krugman (1992), "Inequality and Ignorance" http://www.pkarchive.org/economy/IgnoranceInequality.html

Paul Krugman (1996), "The Spiral of Inequality" http://www.motherjones.com/news/feature/1996/11/krugman.html

Paul Krugman (2002), "For Richer" http://www.motherjones.com/news/feature/1996/11/krugman.html

Paul Krugman (2006), "Graduates vs. Oligarchs" http://www.truthout.org/cgi-bin/artman/exec/view.cgi/48/17995

Thomas Lemieux (2004), "Residual Wage Inequality: A Re-Examination" http://emlab.berkeley.edu/users/webfac/saez/e291_s04/lemieux.pdf

Orley Ashenfelter and Cecilia Rouse (1998), "Schooling, Intelligence, and Income in America: Cracks in the Bell Curve." November, 1998. http://www.irs.princeton.edu/pubs/pdfs/407.pdf

Cecilia Rouse (1997), "Further Estimates of the Economic Return to Schooling from a New Sample of Twins." July, 1997. http://www.irs.princeton.edu/pubs/pdfs/388revised.pdf

Claudia Goldin and Ceci Rouse (2000), "Orchestrating Impartiality: The Impact of Blind Auditions on Female Musicians,"American Economic Review, 90, no. 4 (September 2000): 715-741. http://www.jstor.org/view/00028282/ap000014/00a00030/0?currentResult=00028282%2bap000014%2b00a00030%2b0%2c01%2b20000900%2b9995%2b79999099&searchID=8dd55340.10893069360&frame=noframe&sortOrder=SCORE&userID=8070c9f8@princeton.edu/018dd5534000501264bc2&dpi=3&viewContent=Article&config=jstor

Mark Thoma reads Edward Bellamy on inequality: http://economistsview.typepad.com/economistsview/2006/12/how_inequality_.html

Bookmarks on del.icio.us tagged with "inequality" by jbdelong: http://del.icio.us/jbdelong/inequality

Value Chains

Lance Knobel writes:

: I went to an interesting unconference on talent today at Electronic Arts. I was involved in a discussion on "the big pipe": the need to reform the US education system so the country can have the talent necessary to thrive in the coming decades. One point we agreed on was the need for companies both to understand and lobby about the importance of education.

An executive from Starbucks made the excellent point that CEOs have a limited bandwidth for issues. For many, healthcare looms far larger than education. After all, she said, Starbucks spends more annually on employee healthcare than on purchasing coffee

Hoisted from Archives: Charles Murray Has Misled People Before...

From the archives:

David Brooks Gets Burned by Trusting Charles Murray: Archive Entry From Brad DeLong's Webjournal: David Brooks gets burned by trusting the American Enterprise Institute's Charles Murray:

The Atlantic | September 2003 | People Like Us | Brooks: My favorite illustration of this latter pattern comes from the first, noncontroversial chapter of The Bell Curve. Think of your twelve closest friends, Richard J. Herrnstein and Charles Murray write. If you had chosen them randomly from the American population, the odds that half of your twelve closest friends would be college graduates would be six in a thousand. The odds that half of the twelve would have advanced degrees would be less than one in a million...

Ummm... No. Definitely not. Back when The Bell Curve was published, according to the Statistical Abstract, 22.2% of Americans over 25 had bachelor's degrees (an additional 7% had associate's degrees) and 7.5% of Americans over 25 had advanced degrees. Draw 12 people at random from this set, and if my hasty back-of-the-envelope calculation is correct* the odds that half of them will have college degrees is 2.5% (7.2% if we are counting associate's degrees)--not "six in a thousand." The odds that half of 12 people drawn at random from this set will have advanced degrees is 0.1%--not "less than one in a million." I can't for the life of me figure out what calculations Murray was trying to make that would produce his numbers. But whatever calculations he made, he is off by a factor of 4 (or 12, if we are counting associate's degrees) for the college-educated and off by a factor of 100 for those with advanced degrees.

"Does being off by a factor of a hundred (or four) really matter?" you ask. "2.5% or 0.6%, 0.1% or 0.001%, the odds are still low--and the point that American society is not well-mixed is still true. " But Murray's (and Brooks's) point is not that American society is not well mixed. Their point is that American society is totally stratified--and that is surely false.

And there is another point. Brooks's reference to the "first, noncontroversial chapter of The Bell Curve" is hard to read as anything other than a partial attempt to try to rehabilitate the reputation that Charles Murray shattered by writing The Bell Curve. It is worth noting that nothing Charles Murray writes can be trusted without being independently verified, and that even the first chapter of The Bell Curve is "controversial"--that is, flat-out wrong.

*Suppose we draw twelve people at random. The chance that all of the first six we draw will have college degrees is 0.222^6. The chance that all of the last six we draw will not have college degrees is 0.778^6. The chance that both of these things will happen together is the product of those two numbers--0.0000265. But we don't care about the order: we would be perfectly happy if numbers 2, 4, 7,8,9, and 12 had college degrees. So we need to multiply 0.0000265 by the number of possible ways in which six college and six non-college graduates can be ordered. There are (12!)/((6!)(6!)) such ways--924 such ways. Multiplying 0.0000265 by 924 gives us 0.025--our 2.5% number.