On the value of liberal arts education

I find a recent opinion article on CNN by Michael Roth, the president of Wesleyan University, on the value of liberal arts education rather upsetting. I can understand that as the president of a liberal arts college he wants to defend this particular type of education. But his arguments ring particularly hollow, and I would have expected better from someone leading on of the best liberal arts colleges.

His selling points are the following. 1) A broadly-based education is better then professional or technical expertise. 2) Liberal arts develop critical thinking and creativity. 3) Focusing on science and engineering is a serious mistake. 4) Effective implementation of new technology requires social and economic understanding. 5) Scholarship in humanities increasingly requires scientists. 6) Flexibility is important on the job market.

I agree that an education can be too narrow. But the US liberal arts way of doing it is a waste. Undergraduate students spend less than two years worth in their chosen major, and most end up being functionally incompetent in their major as they graduate. I realize this is largely due to the fact that high schools failed to give them this broadly-based education as they water down requirements. But there has to be a better way. Send those who have not yet mastered the general education requirements to community colleges, for example.

If the US is the bastion of liberal arts, as Michael Roth claims, then he cannot claim it favors critical thinking. I am continually amazed how US students woefully lack in this regard, with few exceptions of course. They are not interested in what they are studying or the world outside. They are very passive and minimalist students. This is favored by the "anything goes" attitude that liberal arts favor.

The reason why the US is a world economic leader is that it has a scientific and technological edge, and that is has economic policies that provide good incentives, at least better than the rest of the world (and that Americans are obsessed with working). That edge is waning because other countries are catching up on the scientific and technological front and have already surpassed the US in several areas. Michael Roth apparently thinks it is wrong to try to keep that edge, and that one should focus more or social sciences, humanities and fine arts. He got the causation wrong. One can afford this when one is rich, but it does not make you rich.

I think he right on the fourth point. It is useless to engineer better crops if you cannot find a way for people to adopt them. But one does not need more liberal arts majors than scientists to achieve this. His fifth point actually shows liberal arts needs science, so science should not be discouraged.

I also agree with his sixth point. That is why one should have sufficient time to teach not just the recipes of a field, but also where they come from. This allows a student later to come up with new solutions to new problems. But the 3-4 semesters in a major do allow this. The result is that in fields where this is not sufficient students are not competent enough and end up with jobs outside their major and with low pay. Just look what pay is across majors. Liberal arts majors are consistently at the bottom, also due the fact that there are just too many of those students.

No, we should not encourage liberal arts education. This should be done in high school and community colleges. Let universities concentrate on the teaching of the core and produce truly competent professionals.

Medical expenditure and technology growth

People are running scared about the relative increase of health care costs. As discussed recently, there a many potential explanations out there, my preferred one being that service goods that rely heavily on labor are bound to become relatively more expensive than manufactured goods that become cheaper to produce with technological progress. But one may also worry that this progress does the exact opposite for healthcare, if more technology makes it more expensive. Two recent papers look at the connection of technological progress and health care costs.

Justin Polchlopek wants to understand better medical technology and break away from using total factor productivity. Basically, he goes back to good old input-output modelling because he wants to avoid issues with capital aggregation that may matter. New technology in the medical sector is then equivalent to new capabilities in the model. Unless the use of existing capabilities is reduced, it is then obvious that efficiency will be reduced. This means that how new technologies are diffused and how they replace old ones is critical. Add in poorly designed insurance, and you have a recipe for disaster, but it can be largely reversed.

Amitabh Chandra and Jonathan Skinner take a very different approach, focusing on demand and supply. They use a more aggregate health care production function and study what determines health care productivity. They categorize three types of technologies: (I) highly cost-effective with little risk of overuse; (II) highly effective for some people/diseases; (III) uncertain treatments. Of course, focusing on (I) will increase productivity, while (III) is very costly for potentially little effect. The health care costs balloon if patients ask for the latest technology, which often falls into (III). Insurance systems, whether public or private, need to resist accommodating all such requests.

All in all, both papers show that new technology can become very costly if it is mismanaged. This can be corrected with insurance schemes that let patients feel in their pocketbook some of the consequences of their choices. Incentives through the budget constraint remain powerful disciplining devices.

Higher local sale tax leads to more local retail activity

Many US states are currently tempted to increase sales taxes in order to overcome revenue short falls. While they should really be thinking about introducing a value-added tax instead, in the short run it is useful to study what the consequences of such a tax increase would be, not just on revenue, but also on economic activity and its composition.

Daria Burnes, David Neumark and Michelle White study the impact of higher sales taxes on retail employment at the local level. You think that higher taxes lead retailers to flee, but one should not forget that local authorities have other tools, in particular zoning. They find that in fact that locations with higher sales taxes have more retail employment, and that is because authorities than make greater efforts to attract big retail outlets. The downside is that manufacturing employment is getting crowded out by these efforts.

The demand for theater

What determines demand for theater? Theater managers should be interested in understanding their market. Beyond this, this is also important for policy as theater is frequently and substantially subsidized. This the characteristics of those who go to theater and how frequently they do so may help understand whether it is worth subsidizing it. For example, if only rich people go to theater, one could leave the state out and let the public pay higher prices, which substitute for taxes (and would then improve efficiency). If it is mostly poor people who attend theater, then it may be worth subsidizing if there is some sort of positive externality from it.

Concetta Castiglione uses micro data from Italy to find results that are not very surprising: everything is driven by education and income. Rich educated people pay more taxes and get them back in part in theater performances. This is even more pronounced than for higher education, for which forceful arguments have been made that the state should stop subsidizing it.

Of course, all this ignores consideration about the supply. but that does not matter here. Demand should be essentially the same whether theaters are subsidized or not in Italy.

Negotiate drug price and availability jointly

Health care costs are increasing faster than general inflation mostly everywhere, and for some time now. While this should not be a surprise, as health care is mostly a service good, there is considerable grief over the situation. Among initiatives to curb down costs are efforts on prevention, instituting copays and regulating health care providers. What about pharmaceutical drugs.

Begona Garcia Marinoso, Izabella Jelovac, and Pau Olivella report on a rather common practice in Europe: external referencing. This is setting a price cap on pharmaceuticals domestically based on what the price is abroad. This has obviously consequences on price negotiations in the foreign country, which is not too happy about this as the pharmaceutical companies are bargaining harder. But if the government can tie in drug authorizations into the negotiations, then prices are further capped and even the foreign country is not hurt. In other words, there is no reason that governments should give away bargaining power by putting price regulation and drug authorization in different agencies.

Entrepreneurs need an educated workforce

Entrepreneurship is the driver of growth and wealth, or at least an important driver. This is why so many initiatives are geared towards making life easier for entrepreneurs. And the champion in the US, with relatively little red tape, low taxes and especially very developed financial markets. One aspect that is much discussed right now is how low these taxes should be, especially as lowering them implies reducing some public benefits such as education. Is there a trade-off?

José María Millán, Emilio Congregado, Concepción Román, Mirjam van Praag and André van Stel use a panel dataset from several European countries to show that education matters for entrepreneurial performance, and it is not only the entrepreneur's own education, but also that of the workforce. An entrepreneur who cannot find appropriate workers or clients who are sophisticated enough for her products is not as successful. While the results are strong, I am a bit wary of using a short annual sample to tease anything out of education measures, but this is worth further investigation.

The shoe-leather cost of inflation is minimal

One popular way to justify the introduction of monetary frictions in macroeconomic models is to assume that there is some cost associated to changing cash holdings, ATM fees or more generally "shoe-leather" cost. Whether these cost matter at all is controversial and settling this requires a two-pronged approach: first find empirically how large these costs are, and second demonstrate that the costs are large enough to matter in a reasonable model.

Alessandro Calza and Andrea Zaghini estimate the shoe-leather cost for the US. This is by far not the first time this is performed, by it can be worth it as data change, and in this case one can suspect that transaction costs indeed have gone down over a few decades. But there is one critical aspect that they take into account: most on US M1 is not held domestically, and this share has increased to currently 60%. Ignoring this seriously biases estimates, first because it overstates domestic demand and second because the shoe-leather cost stemming from inflation is largely borne by foreigners. At an inflation rate of 10%, the cost amounts to negligible 0.05% of total income. At lower inflation rates, it is even negative thanks to foreigners giving up real resources to acquire US money. In other words, you cannot build a monetary theory on this,