Grey Swan

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.

According to international watchdogs, Iran will soon be capable of creating nuclear weapons. Considering its stated desire to “wipe Israel off the map”, we should be alarmed.

What can be done?

When we look back through history a trend becomes obvious. The more powerful a country is, the less likely its enemies will attack it. Seems pretty straight forward.

Unfortunately, since the fall of communism, many in the west have forgotten this. They have come to believe everyone holds similar peaceful intentions. Europe and America proudly disarmed and proffered peace. Tough times had come to an end.

As we might expect, this ideology emboldened our enemies. At the end of the cold war, it would have been silly for any country to try to compete with NATO militarily. Now America’s relative economic and military power wanes and Europe’s military capabilities are virtually nonexistent. Worse, our stated belief that civilian causalities should be avoided at all cost has stopped inimical populations from fearing us. (remember we fire bombed Dresden, and destroyed virtually every Japanese city in WWII. The Romans would enslave and kill any people who opposed them. Many people decided it was better not too.) For a short time, in 2001, this trend reversed. America attacked and defeated Afghanistan, and soon after Iraq. Libya renounced its Nuclear intentions and the world seemed safer.

Unfortunately, when it became clear America’s military would be tied up in occupation, other countries saw an opportunity. By occupying Iraq not only has America’s ability to project force diminished, but Iraq’s (Iran’s long time enemy) has too.The United States should have doubled its army. Without any credible threat of military intervention, both Iran and North Korea have flouted international law and have made the world a more dangerous place.

The west has made ideological mistakes as well. It has neutered its cultural ally Israel in an attempt to appease fanatic muslims. Terrorists intentionally target Israeli civilians every day, yet the west not only divests in its ally, but urgest that it ‘show restraint’. Countries are learning that they can challenge the west without major ramifications. And we wonder why the world gets more fanatical.

Time to rebuild our military and change our beliefs.

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.

The DOJ has decided to sue the Fire Department of New York (FDNY) for racism. Why? Minorities score worse than whites on the entry exam, and are consequently underrepresented in the force.

Here is a sample test question:

While operating at a fire, Capt. Green, the commander of the Ladder Company 999, was sent by Chief Brown to locate the exact location of the fire. The fire building was two stories in height with a basement. Capt. Green found that the fire was located in one corner at the rear of the basement. The best way for Capt. Green to write this information in a fire report upon returning to the firehouse was as follows:

   A) “The fire was located on the lower level, in the rear.”
   B) “The fire was located in the southeast corner of the lower level.”
   C) “The fire was located in the southeast corner of the basement.”
   D) “The fire was located in the rear of the basement.”

The answer is C. Clearly you should give as much detail as possible when writing a report.

However, some people believe the test is culturally loaded. Does the above question look cultural? No. Being able to write a report, navigate a building, and understand simple written and auditory commands is essential for a firefighter. If the test is made easier, more minorities may enter, but the quality of the FDNY will decrease.

Fire Commissioner Nicholas Scoppetta has defended the FDNY by pointing to a rise in minority representation:

“In the five years since this administration took office, we have tripled the minority hiring rate,” said Scoppetta, noting the jump from to 15% from 3%. “I don’t see a perceived deficiency here … we are working to make the department look like the city we serve.”

The jump is because the test has been made easer.

Unfortuanetly, the FDNY may actually lose this case. The DOJ will argue that higher minority failure rate proves the test is biased. They will go on to use experts who explain how deep and entrenched culture bias is, etc. The FDNY will defend itself apologetically, just like Scoppetta. Its lawyers will say it is trying match the cities racial proportions, it is just not there yet. By agreeing with an assumption that differences in failure rate are a solvable problem, the FDNY will probably lose, but it won’t lose badly. The FDNY is probably most afraid of losing money and retroactive hiring. To avoie massive monetary remunerations, it has already accepted that it will need to reduce the quality of its recruits.

What should the FDNY do? If it accepts the assumption that all groups are inherently equal, it will need to prove that its’ test is not biased. Explaining that lower educational attainment among minorities is responsible for their lower test scores will be its best bet. Unfortuanetly, this argument tends to fail before a jury or a judge. If one group is less educated shouldn’t we try to help them by affirmitive action? Isn’t the lack of education just another example of discrimination?

The best argument is that there are intractable differences in groups that explain disparate passing rates. Of course, this will require lawyers to fight the ‘common knowledge’ of 300 million people, and it will be ‘rightly’ defeated as racist.

The Catch 22 – You are discriminating by using a test that minorities fail, and you are racist if you explain the root cause for minorities failing.

We continue to sacrifice the quality of our institutions because we continue to hold incorrect assumptions.

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?

1. 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***.
2. 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.