Photographer: Jeff J Mitchell/Getty Images

Ahead of Yellen's Teacher Town Hall, a Look at Education Economics

The Fed Chair will speak in a town hall with teachers this week
From

This week, Federal Reserve Chair Janet Yellen will speak with teachers at a town hall meeting. Before she does, here's a reminder that education is a fundamental driver of economic outcomes in the U.S. 

About 1 in 2.6 families headed by an advanced degree holder has more than $1 million in wealth, versus 1 in 110 headed by someone with only a high school diploma. That's one of several data gems in a St. Louis Fed primer on the education-economics link published this month — you can read more about it in the first part of our weekly research wrap. Economists also have dug into whether we're using the right discount rate in policy cost-benefit analysis, the tie between business dynamism and productivity, and the future of U.S.-China relations.

Check this roundup every Tuesday for new and interesting economic findings. 

Education economics

Educated Americans earn way more, as the chart below shows, and they have far more wealth. They're also less likely to be unemployed: College graduates have a 2.5 percent unemployment rate, half that of high school graduates with no college. 

That said, it’s important not to confuse correlation and simple causation when it comes to the education earnings premium, if you ask St. Louis Fed researchers Scott Wolla and Jessica Sullivan. "Factors such as natural ability and family background also impact both income and wealth and are not caused by having more education," they note. Assortative mating — the idea that people with traits in common like a higher education are likely to marry others with higher education — compounds the wage boost. What's more, the more-educated are more likely to come from better-off families and inherit money. 

Education, Income, and Wealth
Published January 2017
Available at the St. Louis Fed website

Broken cost-benefit analysis

When the federal government analyzes the costs and benefits of new policy, it uses a 7 percent and 3 percent real discount rate, based on a guidance last revised in 2003. The problem here is that rates have dropped way lower over the past 14 years, and the forecast for longer-run rates also is down.

"The evidence supports lowering these discount rates, with a plausible best guess based on the available information being that the lower discount rate should be at most 2 percent while the upper discount rate should also likely be reduced," according to a new issue brief from the White House Council of Economic Advisers. This is wonky but important: Lowering the rates used to analyze projects could alter the conclusion about whether their benefits outweigh their costs. 

Discounting for Public Policy: Theory and Recent Evidence on the Merits of Updating the Discount Rate
Published January 2017
Available at the White House Council for Economic Advisers website

Business dynamism and productivity 

America's business environment has become less dynamic in recent decades: Start-ups are fewer and farther between, as are business closures. Recent research (read it here) suggests that the slowdown could be weighing on productivity growth, but San Francisco Fed economist Huiyu Li is pushing back on that theory. "Data on business entries and exits show that long-term trends in business dynamism do not match trends in productivity growth," Li argues. What's more, evidence suggests that the average existing firm today is nearly as innovative as the average new firm and the idea that old firms don't contribute as much to productivity is flawed, Li says. 

How Does Business Dynamism Link to Productivity Growth?  
Published Jan. 9
Available on the San Francisco Fed website

Why you should worry about China

Bank of America Merrill Lynch's Ethan Harris argues that we should worry less about U.S.-Mexico relations, and a lot more about the risks around U.S. relations with China. "China has the second-largest economy in the world, while Mexico ranks fifteenth and is about one-tenth the size," Harris writes.

Need more evidence? Just remember last year, when economic and market shocks from China triggered pretty serious stock-market moves. Should President-elect Donald Trump make good on his promises to label China a currency manipulator and use presidential powers to combat Chinese trade practices, it could disrupt America's connection with its Asian partner. If any of those things happen, China could respond by shifting spending away from American exporters or using anti-monopoly laws to punish U.S. companies operating within its borders, he writes. 

"Our baseline forecast assumes a small shock to the global economy and markets, but we will likely learn the degree to which these potential risks become reality in the coming months," Harris writes. 

Ethanomics: Breaking Up is Hard to Do
Available to clients
Published Jan. 6

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