As college enrollment goes up, social mobility continues its 50-year decline. On this episode of the Capitalisn’t podcast, Luigi and Kate look for answers in the latest research on the role of higher education. Are today’s universities engines of social mobility or simply bastions of privilege?
Kate: Hi. I’m Kate Waldock, a professor at Georgetown University.
Luigi: And I’m Luigi Zingales, a professor at the University of Chicago.
Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.
Luigi: And, most importantly, what isn’t.
Kate: We’re two economists who think that capitalism today is a sorry state of affairs.
Luigi: And we’re here to figure out how to make it better.
Kate: So we’re going to kick off today’s episode by talking about what’s fair and what’s unfair in college education in the United States. So, Luigi, a question for you, are universities in the United States engines of opportunity or are they bastions of privilege?
Luigi: I think they are a bit of both. They definitely are a big engine for opportunities if you get in. Access is not as equal opportunity as at least I would like it to be, and in that sense, they remain a bastion of privilege.
Kate: In terms of the actual college experience, we’re going to start by talking about the return on education if you view it as an investment.
Luigi: So until very recently, we knew relatively little about what happened to people when they went to college, and things have changed dramatically in the last few years, thanks to a very entrepreneurial researcher called Raj Chetty. He used to be at Harvard. Now he is at Stanford. He was very entrepreneurial, because he wanted to get the IRS data.
Kate: I think it’s important for me to interject here and say what this data set looks like. So it includes every tax-paying individual in the US, so people’s names, their social security numbers, and how much income they make, so it’s highly confidential.
Luigi: If you get that data and you can link fathers and children, you can get a sense of mobility across generations. Now to get that data is very difficult, because, as you can imagine, they are very, very confidential. And he had a brilliant idea, which was why don’t I do some work for the IRS so I can get ahold of those data? And so he posted a bid to actually work for the IRS, and he was rejected.
Kate: Are you allowed to be talking about this?
Kate: He’s not going to get mad at you?
Luigi: This is all legal. It’s not that there was anything illegal here. He actually posted a bid to do some work for the IRS as a company, and the first bid was rejected, because he has no track record, and then he realized that if he bid zero, that he would do the work for free, the IRS will have to pay attention to him.
Kate: I’m sorry. Did he just create a shell company? Was this like a laundromat called Chetty, Inc., and he just applied to wash their uniforms or something? What is this company that he created?
Luigi: Actually the company is not a shell company. It’s a real company that does work for the IRS, data processing for the IRS, but he does it for free in exchange for access to the data. The taxpayers benefited from this, because they got the work done for free, and he benefited because he had access to phenomenal data.
Kate: Yeah. OK. This is brilliant.
Luigi: With this data, in the last ten years he has produced an enormous amount of papers that answer all the questions you want to know about how difficult it is to go into college, depending on your background, how much of a difference does it make. So, for example, 70 percent of an incoming class at Harvard comes from the top 20 percent of the distribution of income of parents, and 15 percent is from the famous 1 percent. So if you come from the top 1 percent, you are 77 times more likely to get in than if you come from the bottom 20 percent of the distribution.
Kate: Yeah. Another thing that Chetty finds is that there’s a lot of segregation across colleges, and by that, I mean some colleges are made up entirely of rich kids and some colleges are made up almost entirely of poor kids, and so there’s this idea that people go to college to mix and mingle with people from all walks of life, but that actually often isn’t the case.
Luigi: So the question is why there is this segregation. Is it because people who come from richer families are better trained and make it into better colleges? Is it because the legacy is important, and so if I come from a wealthy family, I’m more likely to get into a college because my parents and my grandparents donated to the university and went to that college? Or is it a combination of the two?
I think that this is a question that Raj Chetty has not been able to answer yet, but I think that’s very important for us to think about what’s wrong and what can we do about it.
Kate: Yeah. So econ-speak for this is there are selection issues, right? So maybe the best students are going to the best colleges, and the worst students naturally go to the worst colleges, and so when we’re comparing outcomes, it’s not really telling us anything about mobility. It’s just telling us something about their inherent differences.
One of the challenges in these studies in looking at the effect of education on your long-term outcomes, on your long-term earnings is that it’s hard to tell what’s causing things. Was it the actual education that benefited you, or was it just the fact that you were naturally smarter, you went to a good school, and that makes you better off in life?
So one trick that people use is that they look at identical twins, some who went to good schools, some who went to worse schools. They look at outcomes in earnings based on how much you’re making like 10 years out of college. Another trick that people use is that they actually go directly to the college and they get admissions criteria. So students often get scores by the admissions group. They take into account your SAT score, and your grades, and your sports and stuff, and they give you a number, and they just have a cutoff based on where you are as a student, as an applicant.
Some of these studies have looked at students who are right above the cutoff versus right below, and so they were basically similar on everything except that some happened to just meet the cutoff, and then they compare their outcomes in terms of future earnings. That is another method that people use to get around this question.
Luigi: If you look at people that were just above and below the cutoff, what is the impact of a college education?
Kate: All of these fancy experiments pretty much lead to the same point, which is that there are high returns to going to college, especially elite colleges. I think one of the takeaways from all of these studies is that there aren’t huge differences in what we know about the value of a college education, if you’re using a fancy experimental design versus if you’re just looking at the raw numbers.
Luigi: But what is the difference between going to Harvard and going to Texas A&M?
Kate: You bring up a good point, which is that one of the limitations of these types of studies is that especially if the researcher is getting proprietary information from a college, which is allowing them to look at these score cutoffs, then even though they can make specific causal statements about the impact of going to that particular school, they can’t really say anything that compares one school to another.
Luigi: Yeah. One thing that Chetty’s findings can tell us is that affirmative action does not seem to reduce the placement out of college. So the fact that you admit people from the lower part of the income distribution does not seem to impact the ability of these people to succeed in life. So in a sense, that’s the good news, and maybe something that we should think about whether we want to increase income mobility is other ways to increase access to college and to better colleges by people with low-income backgrounds.
Kate: Yeah. To put some numbers on this, let’s say your parents made nothing. Let’s say your parents were like incarcerated for most of their lives. On average, if you went to like an Ivy League school or an Ivy League Plus, you’re going to be in the top 30 percent roughly of earners, which is fantastic, versus if you are coming from the top 1 percent, your parents are owning the universe, then, on average, you’re going to end up coming out of college in the top 25 percent say of the income distribution, and so that’s not that similar.
It’s pretty reassuring that if you go to a good college, outcomes are similar across people who had bad backgrounds versus people who had good backgrounds, which maybe suggests to us—so this isn’t causal, we don’t know for sure what’s causing this—but it suggests to us that what college is doing for us doesn’t have too much to do with selectivity. It doesn’t have too much to do necessarily with network effects. If you went to a great college and you come from a really rich family, then you’re just mingling with other rich kids, and that’s where the benefit is coming from. It suggests to us that the benefits of going to a good college are pretty accessible across the poorest kids as well as the richest kids.
Luigi: I actually disagree here, in the sense that what he’s saying is that at least once you get in, you’re not discriminated in your networking, because it’s highly possibly that it is all return to networks, and these networks are also open to people coming from low-income families. I don’t think that the evidence we have is necessarily suggesting that it is the value added we give them by teaching. It might be really the value of being around other smart people, for example.
Kate: Yeah. That’s a good point.
Luigi: But, also, the other thing we need to think about is, as you said, I think the statistic you mentioned was very striking, but the chances of somebody whose parents were incarcerated to make it into Harvard is very slim. So I think that what I am personally worried from a social perspective is how can we make better colleges more accessible to a larger fraction of the population, and, again, is this the result of the fact that they get better training at home and with tutors, or is it the fact that colleges have really what is called white affirmative action, legacies.
When I visited Harvard, the students were telling me that their perception is that there are a third of legacy, a third of athletes and affirmative action, and only a third is admitted on the basis of merit. I don’t know whether this is true, but if it is true, it’s pretty scary.
Kate: Are you bringing this up to taunt me? I guess this is probably an appropriate time for me to talk a little bit about my background. I went to Harvard as an undergrad. Not only that, but I was born in New York. I was raised in Greenwich, Connecticut, and Greenwich is one of the wealthiest parts of the country. It’s where a lot of hedge fund people live.
I fit right into that paradigm of the top kids from the best schools go to the top colleges. Having said that, my parents were pretty solidly upper middle class. What they hinted to me, is that they were right around the top 20 percent of the income distribution.
Luigi: But let’s face it, your parents did not go to Harvard before, right, and you made it on merit, so you are one of the 30 percent who made it on merit. The problem is not you. The problem is the remaining two-thirds, and in particular, the people who could have made it if there wasn’t a legacy issue, and did not make it because others were reserved a spot. I think that, in a sense, is part of the issue.
Kate: Yeah. I don’t know if this is fair for me to say about myself, but I think that I’m the exception that proves the rule, and the reason I say that is because when I was applying to college, there was one college counselor for the whole class, because there were only like 60 people in my grade, and this person told me not to apply to Harvard, because I wouldn’t get in, and he said that the reason I wouldn’t get in was because there were 30 other people applying to Harvard and all of their parents went to Harvard, and so I didn’t have that, and so there was no chance for me to get in, so I might as well not waste my early application on this.
And I did get in, and I think the way in which I proved the rule is that it was very obvious to me right away that it conferred huge benefits upon me. It definitely had a material impact on my life, during college and after college. For example, within a few months of being there, I was taking a 12-person class with a former Secretary of the Treasury of the United States, and so it was very obvious that there are great benefits to going to an elite school, but that the legacy thing was a huge deal, and I just was one of the few people who got lucky enough to have it not hurt my chances of getting in, at least after the fact.
So I feel bad about talking about this, but kind of a legend that was pretty popular at Harvard was that there was a thing called a Z list. Apparently, if you are the child of a donor, like a very wealthy donor, but you may be a marginal case to get in, they admit you at the very last minute. They admit you in June, like once everyone has made their college decision, and so it’s too late for you to be part of that class, but they make you take a year off, and then you can join after that, and so these people are called Z listers. There’s a handful of them. They’re supposed to come from the wealthiest of the wealthy.
There’s no evidence. Harvard has never fessed up to this, but I will say that I happened to know a few kids who took a gap year between high school and college, and these kids just happened to have parents who were probably billionaires.
Luigi: What can be done at the level of basic education, so that more people have a fair chance to get in, because I have no problem with the smarter people getting in. What I do have a problem is that sometimes there are a lot of smart kids who don’t have a chance to even try, because they were poorly trained, and the poor quality of our primary education is a big issue.
Kate: I think the issue of what needs to be changed at the primary education level is a little beyond the scope of this episode. Personally, I think it’s probably a more complicated issue and maybe even more important.
But one thing that we can talk about is if you have a college senior who is low-income, what are the obstacles for that individual for getting into college or applying to a good college, and here there are a few different theories. One is that maybe people’s parents can’t afford it at the time that they’re applying to college. One is that they can’t even afford a college application. One is that students lack the information on where to apply to colleges, and another is that maybe there’s just anxiety on the part of the student in applying to a college where a bunch of wealthy kids would be.
One of the people who has done a lot of research in this area is Caroline Hoxby, who is also at Stanford. She identifies high-achieving students coming from low-income neighborhoods. Let’s say people who got a perfect score on their SAT, but are from poor backgrounds. And she separates them into two categories. So she looks at their application behavior and says these high-achieving students from low-income backgrounds, they’re applying to colleges as if they were regular high-income students. And then she separates out a different category, where their application behavior, even though they’re high-achieving, just looks like they’re low-income students.
And what she finds is that between these two groups, there’s not a whole lot of difference in their parents’ education. There’s not a whole lot of difference in their parents’ incomes. What the real difference is, is that kids who are high-achieving that don’t apply to good schools come from small towns. They’re relatively isolated. They come from backgrounds where they’re the only good student in the school for a few years, and so it sort of lends to this information hypothesis that people who are very high-achieving and low-income, and don’t apply to good schools, aren’t applying because they just don’t know that they’re even allowed to. They don’t know that the resources are out there. They don’t know which colleges to apply to. They don’t really have the access to the application process, and that seems to me like a pretty easy barrier to overcome.
Luigi: Yeah. I thought this was more of a problem in the past. There is this phenomenal story of a colleague of mine who is a phenomenal professor of biology, and she grew up in Colorado, and when she applied to college, she only applied to Yale, because Jodie Foster was going to Yale. And when she got rejected from Yale, she said, “I’m not going to go to college, because I got rejected,” and actually thanks to her mother, she applied at the last minute to Colorado Boulder, and she did so well, and she learned a lesson, that when she applied to graduate school she made 13 applications, and she got 13 admissions to every place, including MIT, Yale, and Harvard, et cetera.
So I think that this information hypothesis has some element of truth. I think that it was more important for my generation that grew up without the internet, than for this generation with the internet, but I think it is an important issue that we need to face.
I think the question that we should address is Harvard is a private institution, so they can do whatever they want. So why are we concerned about this, and in particular, what can we do as policy maker or concerned citizen to change the state of affairs? What is your idea, Kate?
Kate: Yeah. That’s a good question. So, to me, it boils down to what the value of education is. Why do we care that we’re going to college? What benefit does it give us? I think it makes a huge difference if you’re going to college and you’re just acquiring amazing skills, and you’re going out into the workforce, and you’re using these skills that you got from your college, because they spent a lot of money on you as a student. I think that’s really different than if the college is just standing by. They’re not doing anything. You get drunk for four years, and then it just happens to be that all the employers afterwards look at your resume, they see you went to a good school, and then they give you a job.
So I think it matters a lot whether colleges are doing things, making a material impact on your human capital, versus whether they’re just stamping your resume and then you go off into the world. If it’s the case that they’re actually adding a lot to your skill set, then I think it makes sense ... Or I think that’s some justification of this elitism. The colleges are spending a lot on their students. They’re training them really well, and so it makes it less abhorrent that they’re essentially picking winners and losers, because there’s actually some process in which they’re making people better off.
Versus if they’re not making any difference in your skill set, they’re just rubber-stamping you, then I think that it’s a huge problem that schools are able to charge like $50,000 a year, and make people go for four years for essentially nothing.
Luigi: But in a sense, isn’t that the free market? Forget for a second that they’re public institutions. Think about it as a private institution. You work for a private institution. I work for a private institution. Harvard is a private institution. They are private agents, and they try to do their best, and why should we, at some level, be concerned?
Kate: I guess what I’m trying to say is that there may be issues in the labor market itself that are causing universities to have to play this strange sort of role in society. So if there is an issue with the labor market, where potential employers have a tough time picking out who to employ, like who to hire, because they can’t get enough information about people or they can’t really process that information, then if we live in this world where the role of a university is just to signal to employers whether someone is a good candidate or a bad candidate, then the policy response should be that the government should intervene and make the employment system better. So the government should make it easier for low-income students to signal to employers that they’re of high quality. Maybe they can offer training seminars or resume writing seminars, something like that.
Whereas if that’s not the problem, if colleges are actually contributing to people’s skill sets and making people more employable, then I think the policy response should be that we should invest more money in public institutions, offering the same sort of education quality as good private universities.
Luigi: I think that my major concern is that all of these institutions are heavily tax subsidized, and to be honest, both of us benefit indirectly from this subsidization, but they receive a lot of ...
Kate: I think we benefit directly, too.
Luigi: We receive huge donations that are tax exempt, and universities have endowments and the return on this endowment is tax exempt. So the government, this is not really a free market, it is a very subsidized market, and so my idea, which will make me very unpopular even with my president, but my idea is the government could easily intervene by saying, “Look, if you want to retain these tax subsidies, you need to follow certain rules.” It’s a bit like with the subsidy for highways, that the federal government says, “If you want the subsidy for highways, you have to have a speed limit,” and in the same way, they say, “If you want to have the free tax status, then you have to have some rules in admission. If you don’t want to have the free tax status, you can do whatever you want. It’s a free country and you admit only your friends and your cronies, be that with you.” That’s not a problem to me, as long as you don’t get any dollar of the US taxpayers as a subsidy.
Kate: Yeah. That’s an interesting idea. I think something that complicates this discussion of tax subsidies is that huge universities are more than just education providers, right? The University of Chicago is doing a ton of research, and that’s part of why the government is subsidizing them, because a lot of the technology that has led to huge gains in productivity has come from universities, and so there’s a reason that governments may want to subsidize research.
At the same time, they’re also providing education, and through the provision of education, they’re picking which people may do well in the future and which people may not, and so there’s this weird link between what universities are doing, and it’s not obvious to me that we should have a single policy in terms of subsidization.
Luigi: I agree, but it’s very easy to separate the two, in the sense that think about liberal arts colleges. They provide basically just education. They don’t do much research, and they get subsidized with a tax subsidy anyway. So if you want to separate and motivate people to do more research, you can do grants, or you can do special provisions for research, and get rid of the tax subsidization in return to endowment, for example. I think that in my view, the endowment is a source of increasing inequality, because you have rich people donating to rich universities that eventually train their kids and make them richer. So if this is done without any taxpayer money, I’m much more laissez faire here. But if it is done with tax money, that irritates me a bit.
Kate: Well, actually as part of the new tax plan, some universities are going to have to pay taxes on their endowments. I think the rule is that if you have over 500 students and your endowment is so big that it’s worth over $500,000 per student attending that university, then you have to pay like 1.4 percent on the net income that you earn as a result of investing that endowment money.
But, at the end of the day, only something like 30 schools total actually meet those criteria, and so it’s a tax with a pretty small base, and it sounds like you’re suggesting something with a broader base, but some sort of tax scheme that a school could avoid if it had fairer admissions criteria.
I like that idea, but, at the same time, it opens up room for lobbying by larger schools to adjust the definition of fair admissions criteria, according to how they want it, but also, second, I’m pretty sure it’s going to get us fired and then we’re going to lose funding for this podcast, and we will have been around for four episodes before everything got cut off, and I don’t want that to happen. I’m having fun.