Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

market economy, the price of a certain skill bears no inherent relation to its social value, only its scarcity. I once interviewed Robert Solow, winner of the 1987 Nobel Prize in Economics and a noted baseball enthusiast. I asked if it bothered him that he received less money for winning the Nobel Prize than Roger Clemens, who was pitching for the Red Sox at the time, earned in a single season. “No,” Solow said. “There are a lot of good economists, but there is only one Roger Clemens.” That is how economists think.

Who is wealthy in America, or at least comfortable? Software programmers, hand surgeons, nuclear engineers, writers, accountants, bankers, teachers. Sometimes these individuals have natural talent; more often they have acquired their skills through specialized training and education. In other words, they have made significant investments in human capital. Like any other kind of investment—from building a manufacturing plant to buying a bond—money invested today in human capital will yield a return in the future. A very good return. A college education is reckoned to yield about a 10 percent return on investment, meaning that if you put down money today for college tuition, you can expect to earn that money back plus about 10 percent a year in higher earnings. Few people on Wall Street make better investments than that on a regular basis.

Human capital is an economic passport—literally, in some cases. When I was an undergraduate in the late 1980s, I met a young Palestinian man named Gamal Abouali. Gamal’s family, who lived in Kuwait, were insistent that their son finish his degree in three years instead of four. This required taking extra classes each quarter and attending school every summer, all of which seemed rather extreme to me at the time. What about internships and foreign study, or even a winter in Colorado as a ski bum? I had lunch with Gamal’s father once, and he explained that the Palestinian existence was itinerant and precarious. Mr. Abouali was an accountant, a profession that he could practice nearly anywhere in the world—because, he explained, that is where he might end up. The family had lived in Canada before moving to Kuwait; they could easily be somewhere else in five years, he said.

Gamal was studying engineering, a similarly universal skill. The sooner he had his degree, his father insisted, the more secure he would be. Not only would the degree allow him to earn a living, but it might also enable him to find a home. In some developed countries, the right to immigrate is based on skills and education—human capital.

Mr. Abouali’s thoughts were strikingly prescient. After Saddam Hussein’s retreat from Kuwait in 1990, most of the Palestinian population, including Gamal’s family, was expelled because the Kuwaiti government felt that the Palestinians had been sympathetic to the Iraqi aggressors. Mr. Abouali’s daughter gave him a copy of the first edition of this book. When he read the above section, he exclaimed, “See, I was right!”

The opposite is true at the other end of the labor pool. The skills necessary to ask “Would you like fries with that?” are not scarce. There are probably 150 million people in America capable of selling value meals at McDonald’s. Fast-food restaurants need only pay a wage high enough to put warm bodies behind all of their cash registers. That may be $7.25 an hour when the economy is slow or $11 an hour when the labor market is especially tight; it will never be $500 an hour, which is the kind of fee that a top trial lawyer can command. Excellent trial lawyers are scarce; burger flippers are not. The most insightful way to think about poverty, in this country or anywhere else in the world, is as a dearth of human capital. True, people are poor in America because they cannot find good jobs. But that is the symptom, not the illness. The underlying problem is a lack of skills, or human capital. The poverty rate for high school dropouts in America is 12 times the poverty rate for college graduates. Why is India one of the poorest countries in the world? Primarily because 35 percent of the population is illiterate (down from almost 50 percent in the early 1990s).2 Or individuals may suffer from conditions that render their human capital less useful. A high proportion of America’s homeless population suffers from substance abuse, disability, or mental illness.

A healthy economy matters, too. It was easier to find a job in 2001 than it was in 1975 or 1932. A rising tide does indeed lift all boats; economic growth is a very good thing for poor people. Period. But even at high tide, low-skilled workers are clinging to driftwood while their better-skilled peers are having cocktails on their yachts. A robust economy does not transform valet parking attendants into college professors. Investments in human capital do that. Macroeconomic factors control the tides; human capital determines the quality of the boat. Conversely, a bad economy is usually most devastating for workers at the shallow end of the labor pool.

Consider this thought experiment. Imagine that on some Monday morning we dropped off 100,000 high school dropouts on the corner of State Street and Madison Street in Chicago. It would be a social calamity. Government services would be stretched to capacity or beyond; crime would go up. Businesses would be deterred from locating in downtown Chicago. Politicians would plead for help from the state or the federal government: Either give us enough money to support these people or help us get rid of them. When business leaders in Sacramento, California, decided to crack down on the homeless, one strategy was to offer them one-way bus tickets out of town.3 (Atlanta reportedly did the same before the 1996 Olympics.)

Now imagine the same corner and let’s drop off 100,000 graduates from America’s top universities. The buses arrive at the corner of State and Madison and begin unloading lawyers, doctors, artists, geneticists, software engineers, and a lot of