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With all these enthusiastic
accolades, the obvious question has to do with the possible existence of
any weakness of the book. In this regard
the only significant weakness, at least
in my view, is the treatment of “time
series econometrics.” The author
notes that the introduction of the
time-series analysis approach to modeling
dynamic economic relations in
the 1980s has radically changed the
way of dealing with time series observations
in econometrics. The most
effective acknowledgement of this
fact—not yet known to the author at
the time of writing this book—was the
2003 Nobel Prize award to the two
architects of the “time series revolution,”
Robert Engle and Clive
Granger. Nevertheless, the “time
series econometrics” has weaknesses
that are not mentioned by the author
and should interest business economists.
One weakness of the time series
approach in modern econometrics is
methodological. The traditional and
common approach to econometric
problems of dealing with economic
relationships usually starts with the
regression model that applies regardless
of the type of observations used
for estimation and testing. The author
himself states this very clearly by noting
that “(m)ost econometric problems
can be characterized as situations
in which one (or more) of these
five assumptions (of a classical
regression model) is violated in a particular
way…(The researcher) then
turns …to see whether the OLS estimator
retains its desirable properties
and if not what alternative estimator
should be used” (pages 47-48). The
violated assumption in the case of
variables observed over time is presumably
that of a finite variance. The
standard methodology of econometric
research would call for the determination
of the detrimental consequences concerning the properties of OLS estimators
and for their remedy. In the
parlance of time series analysts, inference
using OLS is “invalid” or “spurious,”
but the author makes no reference
to the standard and precisely
defined properties of consistency, efficiency,
and normality in presenting
time-series analysis. Certainly business
students with an eye to using this
material will notice the disconnect.
A more serious objection, for the
business economist practitioner, to
the unmodified adoption of time
series analysis is that it pushes
econometrics away from economics.
For instance, it is hard to believe that
all that a person trained in economics
can say about the generation of GDP
is that it is determined by a time
trend and a stochastic disturbance, as
the author does on page 334. A business
economist who offers that explanation
to management is sure to be
viewed as lacking important insights.
Similarly, confining one’s interest in
economic variables to their common
(cointegrated) movement through
time without investigating why this
happens is an abdication of professional
responsibility. Finally, discovering
the existence of more than one
cointegrated relationship among economic
variables without having a
prior theoretical explanation for it
goes against the grain of customary
economic research. In the defense of
the author, he is well in line with the
current practice, but given the high
standard of other insights and deliberations
in the book one would expect
more.
Still, the above criticism notwithstanding
the book is excellent and a
pleasure to read just for the fun of it.
Business economists can use it for
consultation on almost any econometric
problem. Even the chapter on time
series econometrics is the clearest
exposition of common practices that I
have seen. And quite apart from the lucid style of exposition and the clarity
of writing, the book is a treasure of
references including an impressive
50-page long bibliography that alone
makes it a worthwhile investment for
practitioners and educators. All in
all, for anybody interested in the subject
the book is a gem in the field of
econometric literature.
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Buy
this book at the NABE Bookstore at Amazon.com |
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Inequality in America:
What Role for Human
Capital Policies?
By James J. Heckman and Alan B. Krueger. 2004. Cambridge,
MA: MIT Press. Pp. 370. $40.00 hardcover.
From time to time,
the economics deities
gather on Mt.
Olympus and battle.
This battle,
the third Alvin
Hansen Symposium
at Harvard,
is a debate on the role of human capital policies in
response to inequality. Nobel
Laureate James Heckman and Pedro
Carneiro (both of the University of
Chicago) cast thunderbolts from the
sky—radically revising human capital
theory and advancing a strong, new
interpretation of the empirical evidence.
Alan Krueger (Bendheim
Professor of Economics and Public
Affairs at Princeton) offers a strongly
argued alternative that yields remarkably
different policy recommendations
given substantial agreement
about both theory and the relevant
empirical evidence.
Krueger’s 75-page essay “Inequality:
Too Much of a Good Thing”
opens the book. He sets out the basic
facts regarding changes in the distribution
of income and earnings and
discusses various perspectives on the
nature, consequences, and causes of
inequality. He evaluates evidence on
the returns to investments in human
capital from preschool to college and
proposes policies to reduce though
not eliminate inequality. His essay is
admirably broad and well worth the
time of anyone who wishes to become
acquainted with contemporary research
on inequality and human capital
development. However, the 163-
page treatise by Carneiro and
Heckman that follows is the heart of
this volume. Their tour de force opens
the debate, attacking much of the
conventional wisdom regarding
human capital theory, research, and
policy.
Carneiro and Heckman argue
first that because “learning begets
learning” investments in human capital
are more productive both earlier
in the lifecycle and for higher-ability
individuals. By extension, returns to
schooling are higher for children from
higher income, more educated families.
Second, human capital theory
and policy must recognize the
dynamic interactions among families,
schools, and businesses in the development
of human capital over the
lifecycle. They state (313), “Schools
work with what families give them.
Job training programs work with what
schools and families give them.”
Third, non-cognitive skills (such as
motivation, leadership, honesty, and
social skills) are at least as important
as the cognitive skills that are most
often the sole focus of human capital
theory, research, and policy. Both
types of skills are forms of human
capital and not rivals of human capital,
as models employed to analyze
policy frequently assume. |
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Review by W. Steven Barnett,
National Institute for Early
Education Research,
Rutgers University |
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Carneiero and Heckman begin by
reviewing the data on inequality, but
they focus more attention on inequality
in schooling and skills, including
the early origins of these inequalities.
They also review evidence for the
effectiveness of policies and programs
across the age span. They conclude
(90) that “at current levels of
spending in the American economy…
the return to investment in the
young is apparently quite high; the
return to investment in the old and
less able is quite low.” Their graphics
portray the return to human capital
investments as falling below an
acceptable rate just after the preschool
years. In depth, their views
have more nuances. Cognitive ability
is much less malleable beyond the
early years, while non-cognitive abilities
can be significantly altered well
into the adolescent years.
Reviewing specific programs,
Carneiro and Heckman find that preschool
education is highly effective,
although with more impact on noncognitive
than cognitive abilities.
Schools are much less productive,
and returns are low to increased
investments in K-12 education in the
form of higher salaries, smaller classes,
and so forth. They suggest that
structural changes that increase
school choice and competition should
have higher returns, but are careful to
note that returns to increased investment
in schools are limited by what
families contribute to the production
process. They also conclude that
added investments in job training and
higher education have low rates of
return, particularly for lower ability
adolescents and adults. Tax and
immigration policies are deemed
unlikely to reduce inequality in skills
much.
Carneiro and Heckman note
some exceptions to their general thesis.
They find short-term credit constraints
limit college attendance for up to eight percent of the population.
Financial programs targeting these
families could pay off. School-based
interventions with adolescents still
enrolled (but not dropouts) have substantial
impacts, particularly on noncognitive
skills. Private job training
has a relatively high rate of return but
does not reduce (and may increase)
inequality. Public policies providing
training in the classroom have high
rates of return, though other public
job training programs do not.
The exceptions are taken to prove
the rule, because they are relevant to
so few people and have such small
impacts on inequality. Carneiro and
Heckman conclude (123): “the ability
that is decisive in producing
schooling differentials is shaped
early in life. If we are to substantially
eliminate ethnic and income differentials
in schooling, we must start
early.” Thus, a “serious reformulation
of human capital policy is needed.”
Yet, even with the benefit of a
response and rejoinder, the reader is
left with only hints as to what this
might entail beyond rejection of most
current policies and movement
toward choice, competition, and local
incentives in schools. Most intriguing
are their statements that emphasize
early family policy (135): “Good families
promote cognitive, social, and
behavioral skills. Bad families do not.
The relevant policy issue is to determine
what interventions in bad families
are successful.”
Krueger presents a stark contrast
despite seven major points of agreement,
including the importance of
non-cognitive skills (business economists
will welcome the inclusion of
such skills in human capital studies)
and high returns to preschool programs.
He finds that rates of return to
human capital investments at the
margin are more or less equal (at
around ten percent) and tend to be
the same or higher for children from low income families, so that broad
increases in public investments in
human capital are warranted.
Krueger’s conclusions differ due to
different interpretations of the same
evidence, different assessments of
the size of effects on which there is
qualitative agreement, and a lower
estimate of the opportunity cost of
funds for public investments.
Krueger calls for increased public
investments in human capital over
the life span targeted on low-income
individuals: full funding of Head
Start and Early Head Start, full funding
of Job Corps, a longer school year
(offering vouchers for summer programs),
and class size reductions. He
also recommends compulsory school
attendance age be raised to 18, merit
pay to raise teacher quality, increased
funds for adult training under the
Workforce Investment Act, and
income maintenance allowances for
trainees.
The details of policies are shown
to matter greatly. Thus, Krueger can
be faulted for recommending current
programs such as Head Start and
Early Head Start that fail to implement
what is known about effective
preschool education policy. Carneiro
and Heckman can be faulted for a
lack of detailed recommendations,
and because evidence of large noncognitive
externalities (e.g., crime
reductions) and diminishing marginal
returns is too strong to conclude that
social rates of return are lower for
poor children.
Neither Krueger nor Carneiro and
Heckman leave the reader entirely
satisfied, a not surprising result given
the importance and complexity of the
subject. After reading this pathbreaking
book, the reader is much
better prepared to assess both positions
and arrive at independent conclusions.
The emphasis on comparing
marginal costs and benefits of these
programs suggests that many new policies may be best evaluated as
substitutes rather than supplements
to existing programs. This result
might lead to greater consensus in
policy recommendations, and this is
an important result. |
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