Published by the Foundation for Economic Education (Click here)
What is Inflation?
The concept of inflation (the depreciation of purchasing power of a specific currency) can be applied to other goods besides money. Inflation is directly connected to the Law of Supply and Demand. As the supply of a commodity increases the intrinsic value decreases, as the good becomes more scarce the value of the good increases. This same concept is also applicable to tangible items such as vintage baseball cards and rare art. These are incredibly scarce commodities that cannot be authentically replicated therefore they command a high value on the market. On the other hand, mass-produced rookie cards and replications of Monet’s work are plentiful. Yield little value on the market.
If inflation and the opposite principle of deflation applies to money and other physical goods, could it also be applied to intangible goods? When looking at the labor market this becomes quite evident. Jobs that require skills that are rare or exceptional tend to pay higher wages. There is a notable caveat to this observation, that is compensating differentials. Which is a higher rate of compensation for a job that is risky or otherwise unattractive. The higher wages are due to a paucity of workers willing to accept the job, rather than possessing skills that are in demand.
The Signaling Function of College Degrees.
Over the past couple of decades, credentialing of intangible employment value has become more prevalent. Credentials can range from college degrees to professional certification. One of the the most common form of credentialing has become a 4-year college degree. This category of human capital documentation has evolved to take on an alternate function. Outside of a few notable exceptions, bachelor’s degrees no longer operate as a form of job training, but rather serve a signaling function. George Mason economics professor, Bryan Caplan, argues that this function of a college degree is a signal to potential employers that a job applicant has desirable characteristics. Meaning that obtaining a college degree is more of a validation process than about skill-building. An individual may be intelligent, but if they lack other complementary attributes such as conformity odds are they will not complete college. Dr. Caplan’s signaling model for higher education seems to be substantiated by the fact that the vast majority of college graduates are not using their degrees. It was estimated in 2013, that only 27 % of graduates had a job related to their major.
Due to the signaling function of a bachelor’s degree over the year, there have substantial increases in the number of job seekers possessing a 4-year degree. Retention rates for 4-year institutions reached an all-time high of 81 percent in 2017. In 1900 only 27,410 students earned a bachelor’s degree. This number ballooned to 4.2 million by 1940. That number has increased to 99.5 million. Demonstrating the vast proliferation of Americans with college degrees over the past century. Today, just shy of 40 % of all Americans hold a 4-year degree. Considering the vast increase in college attendance and completion, it fair to question if a college degree retains its “purchasing power” on the job market? Much of the evidence seems to suggest that it has not.
What is Credential Inflation?
The signaling function of college degrees may have distorted by the phenomenon known as credential inflation. Credential inflation is nothing more than “… an increase in the education credentials required for a job..”. Many jobs that previously required no more than a high school diploma now are only accepting applicants with bachelor’s degrees. This shift in credential preferences among employers has now made the 4-year degree the unofficial minimum standard for educational requirements. This fact is embodied in gov the high rates of underemployment among college graduates. It is estimated that 41% of all recent graduates are working jobs that do not require any amount of time in a college classroom. It is quite shocking when you consider that 17 % of hotel clerks and 23.5 % of amusement park attendants hold 4-year degrees. None of these jobs have traditionally required a college degree nor is it a prerequisite currently. Due to a competitive job market where most applicants have degrees, many recent graduates have no means of distinguishing themselves from other potential employees. Leaving them with no other option than to accept lower-paying jobs.
The Two-Pronged Debasement.
The value of the college degree has been debased in ways. First, its value has depreciated due to the vast increase in workers possessing degrees. This form of devaluation mimics the effect of introducing more money into the economy has on the value of a currency. Following the Law of Supply and Demand, the greater the quantity of a good the lesser the value. The hordes of guidance counselors and parents urging kids to attend college certainly have helped this matter. However, public policy has served to amplify this issue. Through various forms of loan programs, government scholarships, and other programs all have incentivized more students to pursue college degrees. These policies that make college more accessible are precisely what is devaluing college degrees. The current proposal for “free college” would be more expansive than our current policies. Encouraging more people to attend college making degrees even more common and further depreciated.
The second form of credential debasement is a qualitative form of depreciation. Proving that the quality of a college education has decreased over the years is more difficult to definitively validate. Similar to how the Ancient Romans debased their currency by diluting the silver content of their coins, we have done the same to the college curriculum. College students are rarely studying, but are attaining higher GPAs than previous generations. The average full-time student spends less than 30 hours a week focusing on course work. Amounting to approximately 900 hours a year (average full-time worker devotes 1,800-2,000 annual to their job). Yet, the average GPA has climbed from 2.5 in 1940 to 3.1. A potential sign that college is not as academically rigorous as it once was.
This is not to say that brilliant students with aspirations of a career in STEM fields should avoid college. For the average student, it may be a malinvestment in their future. Incurring large amounts of debt to work for minimum wage is not a wise decision. When faced with policies and social pressure that have made college the norm, the signaling function of a degree becomes distorted. If students focused more on obtaining skills than credentials, they might find a way to stand out in a job market flooded with degrees.
The commodity of water is unquestionably crucial to sustaining human life.
Many humanitarians suggest that it is a basic human right that should not be subject to market pricing. However, market pricing serves a crucial role in bridging the information asymmetry between the consumer and supplier. Operating as a quantifiable signal to the consumer indicates the supply of a good or service. While the moral concern of safe drinking water for the poor is a valid consideration, distortions in the price may lead to other unintended consequences (p.228).If the equilibrium price of water is relatively high by the estimates of the consumer this could be an indication of a low water supply. Making pricing mechanisms the prime instrument for curtailing water shortages during a drought. Some pundits would find the idea of placing a premium on the water to be ethically objectionable. Not allowing water prices to rise to market levels may result in dwindling supplies of potable water. Potentially impeding any sincere conservation initiatives making these moral concerns somewhat inconsequential. If all the aquifers, reservoirs, rivers, and tributaries are dried up no one regardless of socio-economic status will have access to water.
Per the book Aquanomics, as of 2012, the state of Utah was the second-largest consumer of water in the western United States. Ironically, Utah also had some of the lowest prices in the region (p.225-226). Part of the reason why the cost of water is so low in Utah is related to the fact that water districts in the states are subsidized by ad valorem taxes. Property taxes have proven to be a “reliable” source of funding for various water projects and regular maintenance in the state of Utah(p.226). Due to water services being supplement by property taxes the connection between the cost of water and consumption has been severed (p.228).
Misaligning incentives away from conservation and making excessive use incentive to the price of water. Whereas if customers were directly billed for water usage based on consumption volumes, people would be more cautious about their overall consumption. As the water supply decreases, naturally the price would rise to make it a built-in mechanism to combat shortages.
Unfortunately, there are several objections to charging customers for water based on consumption. One of the more perplexing arguments against directly billing customers for water services is that it would result in wasting water. Predicated upon a prima facie application of basic economics would assume that higher costs of water usage would incentivize more conservative consumption. Never the less this is a common objection against deriving all revenue from directly billing based upon water consumption. As one could predict that when the price of water increases the demand for water decreases. So what happens to the excess water that is left unconsumed due to the higher prices? In the state of Utah, unused water tends to be stored in “..reservoirs, lakes, and groundwater aquifers until filled..” (p.230). Demonstrating that the assertion that the excess water would be wasted is inconclusive (p.230).
Despite concerns of water being wasted due to allowing the cost of consumption to rise to market levels, there is a great irony in this justification. Even in a system where the cost of water is subsidized the water districts in the state of Utah still face surpluses (p.231). Considering the long duration of time it takes to appropriate water from new sources and that “… new water comes in lump quantities, supply and demand are seldom equated in the same year..” (p.231). Excess supplies will remain until population and industrial growth drive demand towards the water supply (p.231). Meaning that there will excess water supplies until demand reaches the equilibrium point. Single-handedly invalidating this justification for continual subsidizing, the water in the state of Utah. It has even been found that demand for water increases in lockstep with the rise in per capita household income (p.231). This fact only further serves to validate the point that with development the demand for water increases. Per capita income will not increase until more jobs come to a specific geographic area. This tends to be correlated with the development of infrastructure. Displaying the integral relationship between the demand for water and urbanization.
One variable that is outside of the realm of human economic behavior that can influence the water supply is participation. Regardless if more development occurs throughout the water districts of Utah, no one can control weather patterns
(p.231). Should customers be locked into a flat rate in years where there is a large amount of rainfall? Vice versa in a year with scant precipitation is it reasonable to charge the same amount as a year with abundant rainfall? Anyone familiar with the underlying principle behind the Law of Supply and Demand would be baffled by this logic. Could easily speculate how the water supply could become distorted by such a flawed approach to pricing. Providing credence to the approach of utilizing market-style pricing to the provision of municipal water. Market pricing mechanisms provide a degree of flexibility based upon environmental conditions (p.231). This provides a rational approach to the allocation of water and would most likely not lead to the shortages projected by many critics.