30. Does College Still Matter? And Other Freaky Questions Answered ...

Episode Summary

Executive Summary: This Freakonomics FAQ episode features Steve Levitt arguing that education has strong economic returns, that those returns can be estimated through natural experiments, and that U.S. health care reform failed to fix core inefficiencies. He also predicts Brazilian anti-drug policing will initially raise crime by disrupting informal order and gang property rights.

Main Topics: Returns to Education and College Value (Priority: 5/5): Levitt strongly rejects the idea that college is obsolete or harmful, arguing that education remains one of the most reliable determinants of lifetime earnings. Measuring Causality in Economics (Priority: 5/5): He explains how economists separate correlation from causation using accidental experiments, rather than simply comparing college graduates to non-graduates. Vietnam Draft Lottery as Natural Experiment (Priority: 4/5): The draft lottery is used as a classic example showing how draft risk pushed some men into college, allowing economists to estimate returns to education. Critique of U.S. Health Care Reform (Priority: 5/5): Levitt says the 2010 reform bill failed to solve the two biggest problems: employer-tied insurance and lack of consumer price sensitivity in health spending. Economics of Brazilian Policing and Drug Markets (Priority: 4/5): He argues that cracking down on favelas may increase short-run crime because drug dealers themselves have incentives to maintain local order and control violence. Scarcity and Tradeoffs in Health Care (Priority: 4/5): Levitt emphasizes that health care is subject to scarcity like any other good, forcing difficult choices about spending on life-extending treatment versus other needs.

Key Arguments: More education generally raises earnings; Levitt cites an estimated 8% lifetime earnings increase for each additional year of schooling. A college graduate earns about 30% more on average than someone with only a high school diploma. The education premium has likely grown over time because low-skill manufacturing jobs have declined and the economy increasingly rewards credentials. To estimate causal effects, economists seek accidental experiments where otherwise similar people experience different education paths for reasons unrelated to ability or motivation. The Vietnam draft lottery is presented as evidence that men with medium draft numbers were induced into college, allowing comparison with similarly situated men who got high numbers and did not attend college. Levitt argues the 2010 health care reform did not break the employer-insurance link and may have strengthened it. He says health care is inefficient because consumers often pay almost nothing at point of service, encouraging overuse and misallocation. In Brazilian favelas, drug dealers may actually suppress violence to protect their market; removing them can create a vacuum that raises crime and gang conflict. He suggests that some Brazilian police officers may not be fully separate from the drug economy, weakening the effectiveness of enforcement. Economics ultimately requires confronting scarcity and tradeoffs, especially in expensive health care decisions such as end-of-life treatment.

Data Points: Return on each additional year of education: 8% increase in lifetime earnings - Levitt cites a standard estimate of education returns. College earnings premium: About 30% more on average - Compared with high school graduates. Health care share of GDP: 15%–20% - Used to argue health care is too large to ignore efficiency problems. Example cost of end-of-life care: $150,000 - Levitt uses a grandmother-on-machines example to illustrate scarcity and tradeoffs. Relative cost of Chinese labor: One-fifth to one-tenth of U.S. wages - Explains pressure on U.S. manufacturing jobs and rising value of education.

Pivotal Quotes: "I think that never has anyone made a statement more false than Jonathan Bennett's statement that education would be no help or a disadvantage in the modern economy." — Steve Levitt: Opening response on whether college is no longer valuable. "Why in the world, if you were starting for scratch, would you link it to employment?" — Steve Levitt: Critique of tying health insurance to jobs. "The drug dealers need law and order." — Steve Levitt: Explanation of why removing drug dealers may increase crime in Brazilian favelas.

Implications: Listeners are left with a strong pro-education, pro-market-efficiency view: college still pays, policy should reduce distortions in health care, and crime policy can backfire when it disrupts local incentives rather than replacing them with better institutions.