According to Wikipedia the number of H-1B Visas the US grants each year are decreasing. An H-1B visa permits educated non-citizens the right to work in our country. The concept is that these visas are necessary for the United States to stay competitive in high knowledge industries. Unfortunately, the current system both exploits Americans and under-utilizes foreigners.
The H-1B is essentially a reverse brain drain system. Since everyone agrees a brain drain is bad for a country, isn’t the reverse good? Maybe. If the foreign nationals move to our country to work, pay taxes, and live here permanently, it’s probably a good idea. If they come for a few years to work, pay taxes, get educated, and leave, it’s bad. Unfortunately the latter description seems to be true. While nearly 90 percent of undergrads in top schools are Americans, at the grad level only 50 percent are. The key problem is:
If foreign nationals crowd out American students from top schools but eventually return home, they are actually reducing the long term pool of educated workers. This is exactly what the program is intended to avoid.
What we need are more educated (and smart) Americans, not less. Why? People who produce more than they extract are increasing the average wealth of our country. The current program does this in the short run, but not in the long run. How do we fix this problem?
- H-1B Visas need to be contain a path to citizenship. We want smart foreigners to stay in America and pay taxes year after year after year.
- There should be more H-1B visas to garner more of the worlds best and brightest.
- Universities should be required a maximum amount of foreign students. E.G. 20 percent. This way we give an incentive for foreigners to use their own education systems before coming to America. It would also prevent the crowding out of long term educated American labor.
N.B. The problem is that it takes a while for an H-1B visa holder to repay the cost he imposes on Americans. E.G. they consume subsidized education (many schools claim the cost of an education is below there full bill charge), they crowd out places in univerities, they out-compete Americans for jobs, etc. In the long run these policies work because unlike gardening, ’smart’ jobs tend not to be zero-sum, so wages of Americans ought not to be depressed.
I used data from the National Longitudinal Survey of Youth to examine how IQ affects income. The survey takes a set of young people in 1979 (late teens to early twenties) and interviews them on a broad range of issues every few years. While surveys have continued beyond 1996, I only have data up to that year.
In the simple linear regression of Income vs. IQ a clear trend emerges – income diverges by IQ as we age*. This may seem counterintuitive – doesn’t raw intellect matter less and less as we get older? Apparently the answer is no. Perhaps this is because the smartest people continue learning at a faster rate as they age, or perhaps this is because it takes a while for there salary to catch up to the value of work produced. E.G., A McDonalds employee is unlikely to be paid below the value of their production. However, many financial companies use strongly hierarchal structures that effectually underpay recent college graduates. Adoption studies confirm a similar trend: Adopted children’s financial outcome decreasingly correlates with their adoptive parents and increasingly correlates with tested aptitude.
What about education? The problem with controlling for education in the data is that smart people tend to get educated more. Anyone with an IQ over 130 who fails to graduate college likely has other uncontrolled variables that decrease their income outlook. Consequently, we would expect a systematic downward bias in our results. Running the regressions shows just this – IQ decreases in importance but continues to be important.
The unfortunate aspect of the above analysis is that education matters less than many people think. Spending more and more on education meets decreasing returns because the raw material – the people who are being educated – stays the same.
*Note that IQ only explains about 15 percent of all variation in income – other factors continue to be very important.
The current social security bases its benefits on past payments. Two people who have paid in similar amounts to social security will receive similar benefits. Since total benefits received, ceteris paribus, depend on how long you live, life expectancy plays a large factor into how much you get.
At age 65, white women can expect to live to about 85, white men 83.5, black women 82, black men 80. Because of these differences, white women receive about 33 percent more than black men ceteris paribus. This seems unfair. Like most annuities social security should be based on expected values. People who pay the same amount into the system should expect to get the same amount out – otherwise we are discriminating.
In my previous post about education, I looked at the discinentives upper middle class students face for attending top schools. Today, I want to look at another negative effect of such aid – over consumption. Consider the bright 22 year old who has recently graduated college. Let’s say this student plans to attend law school in a few years, but decides to work first. We would expect that he either saves money, or holds onto the money he already saved. By doing so he benefits the country (by increasing national investment -econ 101), picks up some good habits for himself, and reduces deadweight loss*. However, being bright and savvy, this student realizes that most schools look back at your savings before deciding how much financial aid you receive. No savings? Law school is free**. 300,000 dollars in the bank? You get nothing. Since attending a top law school costs about 150,000 dollars, a student who had money but spends it all saves 150,000 dollars. This significantly distorts the behavior of those who have enough money to ‘afford’ school, but not enough where saving 150,000 will not represent a significant subsidy. While all tax subsidies distort peoples preferences, financial aid seems particularly pernicious because its effect is so massive, and its progressiveness is so high.
What can be done?
- Schools can place a greater emphases on past income rather than past savings. This would act as a tax on income rather than savings, which has been shown to have fairly small differences on a person’s behavior***.
- We could forgo financial aid in the first place. Since about 50 percent of students at top schools (at least at colleges) receive financial aid, making everyone pay full bill would halve the price of tuition. The counter argument people usually make is that university generally costs more than what even full paying students pay. This may be true, but it does not change anything. If the school only needs X dollars total from the students, than if you double the number of paying students you would halve X. Certainly wealthier students would benefit, but so might poorer students:
- A) It would reduce the feeling of entitlement that people feel. When people feel entitled they are less apt too work hard and more apt demand others give them their ‘due’. Belief that you are entitled to what someone else has is just a disguised belief in socialism. This is bad for everyone.
- B) It would give an incentive for graduates to make use of there college education by accepting better paying jobs and forcing them to work harder. Utility may decrease for those compelled to work harder, but this would probably be good for the country in general. By reducing financial aid we are removing a particularly distortionary subsidy. The aggregate wealth of America would increase, and this wealth could be better distributed through better taxes.
* Almost all taxes (ignoring those intended to prevent negative externalities) that modify a persons behaviour create aggregate economic losses. If we can prevent behavior modification, we are more likely to have struck upon a good tax.
** Many Law Students from upper middle class families have money in the bank from parents and family, but earn relatively little themselves. Income is a factor, but for people in there 20s, it is already low. College is trickier because financial aid is based on parental income and savings.
*** Increasing taxes reduces the value of each hour worked, but it also forces you to work harder to maintain your financial situation. These effects tend to cancel each other out.
Half Sigma has an interesting post about distressed jeans being trendy. He notes that distressed jeans are significantly more expensive than new jeans, and consequently cannot be bought by everyone. In essence, they are a way of broadcasting to the world ‘I am wealthy*’. This is quite similar to the upper middle class’ obsession with luxury cars. While a BMW generally has more horsepower and gadgets than your average Nissan, it is functionally identical. Yes, you can speed down the highway a little easier in the Beamer, but most of the car’s value comes from other people knowing that you have it. This is not some contemporary idiosyncrasy. Historically, it was considered ‘high class’ to be pale. This showed that you did not have to spend time outside laboring in the fields. In most of the world, being pale is still a status symbol. In the West, being tan is now admired because it shows you have enough free time to head outside and enjoy the sun.
You can argue that price is all determined by supply and demand, and it is. But what is the reason for demand? In this case – Status! What is slightly disturbing about this is that status is a zero sum game. If you move up a notch, by definition, someone else must move down. Consequently, a large amount of resources are spent on competition that does not benefit anyone. It is a reversed free rider problem. People spend resources that they would not have to if they could sit down and come to an agreement. I believe realizing that status (and distressed jeans) are zero sum has at least two important implications.
- It is one factor in the spiraling price of luxury goods (A Blog on this expansive topic tomorrow)
- It may help us predict how the market will react to certain items. For Example, we should not discount an item because it seems so expensive (such as a 1000 dollar martini with a 300 dollar jewel on the bottom of the glass). An item that is overpriced, but whose price gives public recognition to its purchaser may not in fact be overpriced**.
I know that identifying status as zero sum is not new, but I believe that it has important implications when mixing with globalization (because the number of people better off than you seems to increase).
* The best argument illustrating how a high price can feed higher prices is…college. A certain school (whose name eludes me) was suffering declining applicant rates. In order to reverse this trend, said school raised their tuition in line with the Ivy League. The next year their applicant pool increased. Why? Because people searching for colleges saw the high price tag and assumed it had to be good place. The higher price made it less accessible yet more desirable. This is very important as it suggests that college is (to some extent) also a zero sum game.
** Also, indirectly: Consider a world where two companies both produce one type of nail clipper, and sell it for two dollars. One of the companies could simply repackage one of these nail clippers and sell it for more. This way, it would have two identical, differently priced products. Many people would believe that the more expensive nail clippers were better, and choose them.
