The last chapter of Paul Krugman’s Book The Accidental Theorist (1998) is an interesting one. The essay is called Looking Backward and was originally published in New York Times Magazine on 29 September 1996. The main theme of the essay is a proposition of five economic trends of 1996 that we should have expected but yet failed to anticipate. According to Krugman (pp.198-202) these are:
- Soaring resource prices
- The environment as a property
- The rebirth of the big city
- The devaluation of higher education
- The celebrity society
The second and third one probably need some explanation. The environment as a property describes the trend to establish free and foremost efficient markets around natural resources to tackle environmental issues like polluting clean air with clearly established property rights. This trend is driven by the realisation that our environment has limits and natural resources are scarce. Putting a price tag on these helps to reduce inefficient overuse (free rider problem, tragedy of the Commons) and makes people internalize social costs. The rebirth of the big city describes the revival of urban living. This is based on the observation that low-skilled jobs are mainly located in rural areas while high-skilled jobs tend to cluster in cities due to the need for face-to-face interaction etc. As low-skilled jobs vanished people flocked back into the cities they left for the low-skilled jobs in the first place.
What I want to blog about today is to ask the following: Do these observations hold for the year 2016 as well as they did twenty years ago?
Let’s start with resource prices. At the time Krugman wrote his essay, nominal crude oil prices had risen to 22.26$/bbl (September 1996) after the drop to 13.77$/bbl in December 1993. Looking more closely at the monthly commodity price indices compiled by the World Bank one can see that over the period from 1993 to 1996 commodity prices for food, energy or raw materials rose. 1997 and 1998 marked two years of decline before commodity prices took off to unprecedented levels. Recently, however, commodity prices have fallen remarkably. Most notably, the World Bank’s energy index fell from levels in the 130s in 2014 to around 40.5 in January 2016 (2010=100). This is due to the large drop in crude oil prices both driven by supply and demand factors – especially by the increase in oil production of OPEC countries triggering an oil glut and their failure to coordinate to lower production as a response to supply exceeding demand (IMF, 2016). But also the raw material index fell after a spike in early 2011 and the food index likewise fell after mid-2012.
What are the expectations for 2016 though? If one takes the Dow Jones Commodity Index as an indicator, commodity prices are likely to revert again as the Commodity Index has risen more than 13 percent this year (DiChristopher, 2016). Also the benchmark copper price on the London Metal Exchange as well as iron ore prices have picked up again and there are clear signals that we have passed the trough and markets are turning around. ANZ Research for example predicts a 17 percent price rise in nickel, 13 percent price rise in copper and 7 percent in zinc over the next 12 months as well as the bet that short term winners are sugar, nickel, corn, palladium and thermal coal (Fensom, 2016). Also Scotiabank predicts the beginning of a price rally in 2016 driven by a weaker U.S. dollar and less concerns over China (Crawford, 2016). But another important point remains here which Krugman already made in his essay in 1996. Natural resources are ultimately scarce and we are far past an era of low natural resource prices. This is more or less the basic law of supply and demand from ECON101. With ultimately limited supply but increasing world demand, prices will spiral upwards sooner or later and people who are willing to pay the most will win the bidding.
The second theme concerns the promotion of property rights in natural resource markets. In fact, notable research on this can even be dated back to 1991 when Anderson and Leal published their book Free Market Environmentalism (FME). Anderson (2007) notes that there have been FME success stories concerning land and water markets. However, there has been more a trend towards government regulations and active government intervention with the goal to fight climate change rather than the establishment of free markets to let people internalize the costs of environmental degradation etc. (Downey, 2016). The US Environmental Protection Agency is an example of active government intervention to cure market failure and environmental problems and is often criticized for its detailed regulation without improving America’s environment (Smith, 2011). On the other hand, there is evidence for the free market approach in the Kyoto Protocol signed by 192 parties. It does include natural resource market mechanisms, in particular carbon emissions trading to lower greenhouse gas emissions. It has had mixed results in terms of commitment to specific targets (USA, China, India) but the EU Emissions Trading System (ETS) does seem to work with a ‘cap and trade’ scheme which is in principle the least-cost method to reduce emissions (Dawson, 2011). In sum, the environment as a property trend does not seem to accurately describe our state of environmentalism today as we moved more towards detailed regulation rather than a free market approach although there are some well-working counter-examples like the ETS.
The third trend concerns urbanisation. This holds true for today as well as it did for 1996 and – although Krugman probably focused on America – this is a global trend. According to the UNFPA (2016) the world now experiences the highest urban growth in history and today urban areas are home to half of the world’s population. Among the most urbanized regions are North America, Latin America and the Carribbean. What is more, there is a trend towards megacities. These are cities with more than 10 million people of which there are 28 currently (United Nations, 2014). There also continues to be a correlation between a country’s income level and its urbanisation level, i.e. increasing urbanisation is generally associated with increasing economic prosperity. Hence the hypothesis still seem to hold that high-skilled (high-paying) jobs are clustered in population-dense areas.
The fourth observation surprised me a little: The devaluation of higher education. Krugman notes in his essay that the pay-off of higher education has shrunk. Other post-secondary training has taken over university degrees, requiring less time for job training and preparation and therefore lower opportunity costs. He also notes that today’s elite universities are more similar to the nineteenth century as a social institution rather than a scholarly one. Supporting evidence for North America at least comes from the gross tertiary enrolment ratio (World Bank, 2016b). Over the period from 1996 to 2000 enrolment did drop by 11.5 percent. However, contrary to the prediction of its declining value, enrolment thereafter picked up again. Especially during the Global Financial Crisis and its aftermath enrolment increased considerably. This likely stems from the fact that during recessions the opportunity cost of education are lower as less jobs tend to be available. Similar to the experience in 1996 one can see a renewed fall in enrolment in North America. The statistics for the US in particular show a peak of around 96 percent in enrolment in 2011 which is now back down to 89 percent in 2014. This drop might well be explained by improving labour market prospects. The diagram also reveals trends among different income groups of countries; all of which have been on the rise until recently indicating the increasing importance of tertiary education in building human capital even in high income regions like the EU. The world trend in tertiary enrolment has now surpassed 30 percent. However, since the world economy’s recovery enrolment seems to have stagnated (lower middle income) or fallen (low income, high income) with the exception being upper middle income countries.
This analysis does not answer the question completely though, i.e. whether higher education is losing in value today. There is evidence that higher education has transformed over the last years due to fierce competition with other post-secondary schooling. Buller (2014) for example notes that there is a re-orientation towards job training and career preparation and a shift away from pure research to applied research. Furthermore he argues that American higher education which used to be both a preparation for career and for life has now lost the preparation-for-life goal out of sight in favour of job training. This is a bit different to what I understand Krugman observed in 1996. Universities do not seem to turn back to the old days being merely social institutions but rather lean more and more towards job training and career preparation. Evidence for this could be the rise of MBAs and other professional degrees which are very much based on job experience and learning in an applied setting. What is probably more worrisome than a devaluation of higher education in 2016 is credential inflation. Rather than having less graduates on the job market employers face more and more high-skilled graduate applications and can be selective (again the law of supply and demand) so that at some point the master’s degree becomes the new bachelor’s (Pappano, 2011). In sum, I would argue that higher education has revalued over the last decade even if enrolment ratios are currently decreasing slightly. Higher education has increasingly become a source of job training and the higher education landscape has adapted in 2016 to lessen the opportunity cost of gaining a degree (short courses, distance and online learning etc.) as the demand shifted towards job training. It remains questionable whether the developments in higher education are overall a good or bad thing but they seem to be different from 1996.
Lastly, the celebrity society theme is more or less self-explanatory. It is at least as important as 1996 with social media, television and other means being its drivers. Today being a celebrity pays rather than the content because this person is creating an intangible brand that can be marketed without the possibility of “copyright infringements”. Fame has become a true asset in today’s economy with increasing value; even more so than in 1996.
I hope you enjoyed today’s post as a sort of comparison of what changed and what actually didn’t. Thanks for reading!
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