Wednesday, October 30, 2019

NYU Tax Policy Colloquium, week 9 - paper by John Friedman on colleges and intergenerational mobility

Yesterday at the colloquium, John Friedman presented work in progress from his big-data project with Raj Chetty, Emmanuel Saez, Nicholas Turner, and Danny Yagan. This is a very important and interesting project,. However, because it's work-in-progress involving IRS tax data, I won't comment on or link to the draft(s) we saw or heard about yesterday. And as the sessions are off the record, what I'll discuss here, rather than either the work presented or the PM discussions, is issues raised by the research.

Friedman et al have access to data (not to put it passively - they've done a great deal of work to create usable data) that permits them to link (1) college admissions, (2) the applicants' parental / household income, (3) the applicants' test scores, (4) where they ended up going to college, and (5) their labor income (for people born in 1980-82) thirty to thirty-two years out.

The U.S. is a big country, so there's a lot of information here that can be analyzed in various ways. For example, they can look at such questions as how people with different parental incomes and the same test scores differentially attended colleges in particular tiers, how people with the same parental incomes and test scores but who went to colleges in different tiers ended up doing in the labor market at age 30 to 32, etc.

A lot of interesting information can come out of this. For example, what sort of "value add" if any do top tier schools appear to have, in terms of subsequent labor income? Are colleges differentially picking more high income, middle income, or low income students with the same test scores? Do kids from lower income households but with good test scores end up doing better or worse in the labor market than peers from higher income households, if they go to the same schools or to different tier schools? Etcetera; you can add your own questions to this as you like.

Without reporting here on any preliminary results, let me say this. If high-tier colleges have significant value-add, as defined above, and this value-add applies to both lower-income and higher-income applicants, then they have the power to increase intergenerational mobility by tilting towards the lower income in admissions, or to reduce it by tilting towards the higher income. From a structural standpoint, they may have a lot of incentives to do the latter - that is, to offer what is in effect affirmative action for the rich, not limited to "legacies" (children of alums) or to athletes in the specialized types of sports that tend to require rich parents. That would be very unfortunate, as it would mean they were both reducing intergenerational mobility relative to the case where they were neutrally meritocratic (defining meritocracy as rewarding high test scores), and also increasing income segregation at high-tier colleges relative to what would happen if they neutrally applied such a benchmark. We will have to wait and see what the data shows, when final versions of the papers are released.

Suppose top tier colleges have a significant value-add but fewer slots than there are qualified applicants who could take advantage of it. Then there would be an analogy between top tier college admission and allocating scarce kidneys or livers to sick people in acute care wards. In each case:

1) There are more people who could derive full benefit from the scarce resource (restored health, or higher career earnings) than there are available resources. The winners will therefore discontinuously be better-off than the losers, as between people who could have made comparably productive use of the scarce resource.

2) We may be reluctant to allow use of the price mechanism to allocate the scarce resource. We don't put kidneys and livers up to auction so the richest people will get them all. In college admissions, there is obviously more opportunity for the price mechanism to operate, but we may tend not to like the idea of allowing rich kids to buy more slots by having their parents pay more.

To the extent that use of the price mechanism to allocate the scarce resources is restricted, other metrics are going to have to be used. In the case of college admissions, a strong argument could be made for favoring lower-income over higher-income applicants with close or similar test scores, especially if it's shown that the former can at least comparably benefit from the value-add. Specifically, there are two positive externalities to keep in mind. The first is reducing income segregation in top schools, so that richer, middle, and poorer kids mingle more than they would under a caste-like system. The second is increasing intergenerational income mobility, which may have broader social benefits, again in reducing the extent to which we have a hereditary caste system in our society.

If richer kids with the same test scores were disfavored, they could make arguments based on meritocratic desert to the effect that they were being treated unfairly. But this might be at least partly rebutted by noting the advantages they may have had, such as greater tutoring, in getting the same test scores.

If intergenerational mobility is low enough, we also know that it's unlikely to be as truly meritocratic as it appears to be. Income-earning "ability" seems unlikely to be sufficiently inheritable that there wouldn't be more movement up and down, in a legitimately meritocratic process, than we appear to be observing lately.

But of course, while mobility sounds good as an aim (and is good, if we dislike hereditary castes), it does mean people are moving down as well as up. Those who move down, or see their kids moving down, are not going to be made happy by it. And if they're powerful, they may be likely to resist.

I suspect that very wealthy people are more determined to ensure that their kids be the most successful ones in the next generation, whether meritocratically or not, than they are to avoid, say, paying wealth taxes. So the political playout of college admissions over time could end up being interesting and fraught.

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