John Stossel Fails an Education Test and Demonstrates That He’s Economically Illiterate

John Stossel is a Fox Business News reporter.  Stossel is an unabashed “libertarian” with a strong Austrian orientation on economics who focuses on economic issues.  He’s made a living out of being indignant and disgusted by “liberals” and “big government” which he sees as the root of all economic problems.  He’s been quite successful over the years, first at ABC News and now at Fox.   He also writes a blog to go with his Fox News show.

In other research I was doing recently I stumbled upon a post of his from Sept 15 called “Stupid in America” in which he asserts that schools have gotten too expensive and don’t deliver the goods.  In Stossel’s own words and graph:

School spending has gone through the roof and test scores are flat.

While most every other service in life has gotten faster, better, and cheaper, one of the most important things we buy — education — has remained completely stagnant, unchanged since we started measuring it in 1970.

It looks appalling right?  Scores have increased by 1% but the cost of an education appears to have increased by approximately 246% ($43,000 up to $149,000).  Except it’s very deceptive and the obvious product of an economic illiterate.  There’s two clear, elementary economic errors here.

First, he’s comparing test scores, a measure that’s in absolute terms on fixed scale to dollars spent in nominal terms over a 40 year period.  Dollars are not fixed units of measure.  They change value over time because of inflation.  If you want to compare test scores to dollars spent “buying” those test scores, then you need to use real dollars with the inflation taken out.

So let’s do that.  Using the Bureau of Labor Statistics CPI Inflation Calculator, we find that what $43,000 purchased in 1970 would require $241,660. in 2010.  Yes, inflation has changed purchasing power that much.  Inflation compounds so even a 2% annual inflation rate would more than double nominal costs in 40 years.  In the late 1970’s we had some years of inflation in the double-digits.  So really, the graph is telling us the opposite of what Stossel wants us to believe.

The second big problem is that Stossel is assuming that the all money spent on education goes to buying improved test scores in math, science, and reading.  He also is assuming that the inputs, the students being educated are the same in 1970 as in 2010.  They aren’t.  He ignores that we might be paying for something else in addition to math, reading, and science test scores.

Stossel then goes on the attribute all of the problems to education being a government monopoly.  Again, he ignores facts. Facts are inconvenient for Stossel.  Competition has been brought to K-12 education in many areas. Maybe not as much as he would like, but it’s a significant change since 1970.  As his test scores indicate, it hasn’t helped much.

Finally, I want to note that it’s poor practice to not cite your sources and more precisely define your data series.  The graph is labeled “Source: NCES”.  NCES is a huge website and archive of a lot of data.  Stossel doesn’t give a source. Is it because he wants us to take him at his word and not verify or check it out for ourselves? He doesn’t even label what the spending series is to which he refers.  I am assuming it is a “spending per pupil over 12 years” type of series.  A search of NCES for a series labeled as he has it turned up nothing.

I find it enormously ironic that Stossel would make such elementary errors as to not deflate a data series or to not label his measures precisely.  That’s what we demand in principles of economics courses.  What makes it ironic is that on August 23 Stossel takes Congress to task for being “economic illiterates” and not having degrees in economics or business.  Pretty rich stuff from a guy with only a psychology degree who makes elementary economic errors.

Where Are or Were The Jobs?

With the all the alleged concern in Washington now from both parties about job creation, there’s something that’s missing in much of the debate: facts.  So let’s take a look at some.  I really like graphics like the one below.  They’re complex and take quite some time to read and fully absorb what’s there, but they pack a lot of information into a small space.  They’re info-dense.

We hear from the left a lot of talk about “good” vs. “bad” jobs.  Often what they are referring to is the relative wage level of the jobs.  In general, manufacturing and government jobs are “good” because they tend to have slightly higher than average wages*.  Education and health services jobs are a mixed bag with a lot of variation.  Doctors, nurses, and admins do very well.  Home health aides and assisted living workers not so much.  Teachers are either good or bad depending on the state. Leisure and hospitality are generally panned as below-average.

From the right we hear claims that heavily unionized sectors like motor vehicles, parts and manufacturing are holding down growth and killing jobs.  We also hear political conservatives claiming that excessive growth of the government sector has somehow prevented the private sector from adding jobs.

We also hear from the left that it’s lack of demand that is keeping unemployment high.  The right like to claim the unemployment is structural – we have the wrong workforce with the wrong skills.

But what’s really happened?  How have the different policies of Bush and Obama (to the degree they’re different – they aren’t as different as some think) affected the employment picture?  Let’s look a this graph from David Altig, Senior VP at the Atlanta Federal Reserve Bank as posted at macroblog.  It helps to click and enlarge the graph in a new window/tab.

Click to Enlarge

First, let’s examine how the graph is structured.  As always, it’s important to make sure we understand a graph’s axes first.  Horizontally, we have the average monthly change in employment in percentage between Dec. 2001 and Oct. 2007.  This period covers all of the non-recession portion of the G.W. Bush administration.  Industries to the reader’s right grew strongly and thrived under the Bush administration’s policies.  Industries to the reader’s left shrunk. No growth is the zero or mid-line. Next, the vertical axis shows a similar measure, average monthly percent increase in employment, but it’s for the period of July 2009 through Aug. 2011.  This is the non-recessionary months of the Obama administration.  Industries located high up grew under the Obama recovery. Industries low on the scale shrunk and cut jobs during Obama’s recovery.  There’s no tricks here of cherry-picking time periods – both axes cover only the “recovery” portion of each president’s respective time in office.

So looking overall, we have the four quadrants.  The upper right shows industries that have added jobs under both presidents’ recoveries. The lower left are industries that have been cutting jobs under both presidents. Upper left would be winners under Obama but not Bush. Lower right are those sectors that have been cutting employment under Obama but were big growth sectors under Bush.  Finally, the size of each bubble indicates the relative importance of the industry in terms of jobs.

So what can we conclude?  First there are few items that aren’t so surprising.

  • Under Bush, a lot of the employment growth involved construction and financial activities.  Not surprising. This is the Wall Street driven housing and mortgage bubble. Frankly we don’t need that big of construction sector, at least not if it’s focused on housing as it was.  We have too much housing already.  We do have needs for more construction of infrastructure and to the degree that housing construction workers are either in the wrong location or don’t have the skills for infrastructure construction (I don’t know – it’s not my expertise), then the low employment growth under Obama here represents a  structural unemployment problem.  But notice that industry isn’t that big.  Also, we probably don’t want to have Financial Activities come back as big as they were before.
  • The big winners under Bush were Education and Health Services and Professional/Business Services.  In education and health, health dominated.  Not surprising, health care spending has been growing and the population is becoming older and/or sicker.   The growth in professional/business services is probably not really very productive stuff.  A very, very large part of the increase in that area was the huge increase in security personnel and related-security contracting that has arisen from an increasing paranoid insecure society since 9/11.
But there are some items here which are surprising, or at least surprising if you’re believe the normal political rhetoric.
  • First, it was Bush who grew government employment.  Under Obama, government employment has been negative since the recession ended. Shrinking government employment is clearly the single largest drag on the economy. That’s not ideology or belief talking. It’s facts and data.
  • Second, the big reason why the Bush recovery was such a slow recovery for employment, considering the 2001 recession was mild, is that throughout the Bush administration manufacturing shrunk dramatically.  This was the result of globalization policies that provided incentives for U.S. manufacturing firms to locate production overseas or to buy from overseas manufacturers instead of making their own.  Fast growing companies like Apple and other computer companies prefer to design it themselves but to contract with foreign firms for manufacture. Obama has not turned the corner on manufacturing employment, but he has stopped the bleeding. For the U.S. to recover, this sector needs to have positive growth.  Given it’s size, it’s not necessary to rise to the top in percentage terms, but it needs to be positive which it isn’t now.
  • “Manufacturing” does not mean “autos”.  Manufacturing is much worse than Motor Vehicles and Parts.  Too often when politicians talk “manufacturing” they conjure a stereotypical image of auto manufacturing.  In reality, motor vehicles and parts, while not being a source of growth under either, has essentially held it’s own as neutral.
  • The Information industry is the one industry that has shrunk under both recoveries, although it’s not that large.  This largely represents true sectoral, innovation-driven change as the World Wide Web changes information technology.
Finally, let’s see what this graph says about the controversy over is unemployment structural (in which case we need training and incentives to work) or is it a lack of aggregate demand (in which case we need more stimulus spending).  I think the graph is relatively clear in this regard.  We have three very, very large sectors where there is no increase in employment under the current recovery: Manufacturing, Retail Trade, and Wholesale Trade.  These are the three that represent basic total spending.  Retail and wholesale trade are driven by total consumer spending. Period. Retail and wholesale also are very flexible without widespread specialized skills requirements.  When demand exists, they hire. When demand doesn’t exist they don’t hire and may layoff.  To me, the data indicates it’s clearly a lack of demand story that is hurting jobs in this so-called recovery. Reducing government employment right now, like this graph shows is being done, has repercussions in stopping employment growth in retail, wholesale, and manufacturing.

State and Local Job Cuts are Accelerating, Making the Economy Worse and Cutting Education

Nicholas Johnson at the Center on Budget and Policy Studies explains how state and local governments are cutting jobs and how a majority of those jobs lost are education jobs.

September 2, 2011 at 1:24 pm

Three Years of State and Local Jobs CutsToday’s jobs report shows that in August, cuts by states and local governments — especially school districts — wiped out private-sector job gains.

The state and local sector cut 15,000 jobs in August.  That comes on top of a whopping 66,000 jobs lost in July, according to revised figures released today — the worst single month of job loss for states and localities since the recession began in December 2007.  States and localities have eliminated 671,000 jobs since employment peaked in August 2008 (see first graph).

Not coincidentally, July was also the first month of the new fiscal year for most states, one in which they are facing the double-whammy of weak revenues (which remain well below pre-recession levels) and the expiration of temporary federal aid.

Three Years of School Job CutsSome 14,000 of the state and local jobs lost in August were in local school districts, bringing to 293,000 the total decline in school-district employment since August 2008 (see second graph).

Cuts in state education funding are a big reason behind these education-related job losses.  As we reported yesterday, the vast majority of states for which data are available are cutting basic education grants to local school districts to below pre-recession levels.  Some of the cuts exceed 20 percent.

These troubling numbers raise a disconcerting question:  What kind of an economic future will this country have if we keep cutting education?

Income Inequality Widening for Both Men and Women

Income distribution changes, namely, the rich getting richer and the bottom half struggling to stay even is true for both men and women.  It is only partly explained by educational level. Mark Thoma extracts from a CBO report about how workers’ hourly compensation (wages) have changed from 1979 to 2009:

Changes in the Distribution of Workers’ Hourly Wages Between 1979 and 2009

Stay in School Folks

It pays to stay in school.  If not for the higher wage, then at least it’s easier to find employment.  From Calculated Risk:

  • non-business bankruptcy filings Click on graph for larger image in new window.

    This graph shows the unemployment rate by four levels of education (all groups are 25 years and older).

    Note that the unemployment rate increased sharply for all four categories in 2008 and into 2009.

    Unfortunately this data only goes back to 1992 and only includes one previous recession (the stock / tech bust in 2001). Clearly education matters with regards to the unemployment rate – but education didn’t seem to matter as far as the recovery rate in unemployment following the 2001 recession. All four groups recovered slowly.

    The recovery rates following the great recession might be different than following the 2001 recession. I’d expect the unemployment rate to fall faster for workers with higher levels of education, since their skills are more transferable, than for workers with less education. I’d also expect the unemployment rate for workers with lower levels of education to stay elevated longer in this “recovery” because there is no building boom this time. Just a guess and it isn’t happening so far … currently the unemployment rate for the highest educated group is still increasing.

    For more on the impact of education here is a graphic and some links from the BLS based on 2008 data: Education pays …