John Hood: Don't be misled by averages
RALEIGH — Mark Maye and I made an excellent team back in the day.
That “day,” I should add, was actually a few weeks in 1977. I was eleven. Mark was a bit older. He and I played together on a basketball team in Charlotte. We won every game. To be more precise, we dominated every game. There’s a reason my dresser subsequently featured a shiny basketball trophy.
That reason was not, however, my talent for basketball. I was awful. The team was only at risk of a turnover, or of posting less than a 90% field-goal percentage, if Mark passed me the ball. Wisely, he rarely did.
We were a superior team on average. But nearly all our offense and defense rested on the superior ability of a single player.
Policymakers should try studiously to avoid the fallacy of the average. It is absolutely true, for example, that young people who graduate from four-year universities tend to have higher incomes than people who don’t. But it would be a fallacy to conclude, based on differences in average incomes, that all or even most high-school graduates ought to attend universities.
Some students lack the interest, discipline, and scholastic aptitude to succeed there. Others are capable of obtaining a university degree but would be happier — and even better off financially — doing something else after high school.
Moreover, “four-year university” is a category, not an actual institution. Many students do significantly improve their economic condition by attending a specific school to study a specific subject or discipline. Some vastly improve it because the highly-paid professions they enter later — law, medicine, executive management, etc. — require an undergraduate ticket punched on the way to a truly lucrative investment in graduate school. And some university graduates get a negative rate of return on their educations, as I’ve written about many times in the past. The costs of obtaining their degrees, including foregone wages during their time on campus, exceed any gain in post-graduation salary.
When it comes to choosing a path after high school, in other words, what really matters is the marginal effect in specific situations, not the average effect for universities as a whole.
Here’s another example with a North Carolina connection: port facilities. More than 80% of trade involves transporting goods by ship. It’s far easier to float heavy loads on water than convey them by land or air. Thus, the extent to which a given region or country has adequate port capacity can have large effects on productivity, consumer prices, and the earnings and employment of companies and industries.
A couple of weeks ago, the National Bureau of Economic Research released a new paper by economists at New York University, Harvard, and Boston College. They analyzed data for America’s 51 busiest ports. The resulting model showed that for every “slot” added to America’s ports — every additional capacity to accommodate a single ship in a port — trade would rise by 1.3%, with overall welfare going up 0.8%.
So, does this finding suggest the federal government or some other entity ought to finance the expansion of all American ports? Not at all. The statistics were averages. The effects were heterogeneous. Indeed, for only 15 of the 51 ports were the benefits of expansion greater than the costs. Gulf ports such as Houston and Corpus Christi had big payoffs, as did Virginia’s port at Hampton Roads. Our own Wilmington port was among those where the costs exceeded the benefits.
That doesn’t necessarily mean other actors, private or local, shouldn’t invest in the Wilmington port in expectation of private or local returns. It means that, for the nation as a whole, port investment would be better deployed elsewhere.
What true information does my childhood trophy in basketball convey? That Mark Maye — who became a standout quarterback for UNC, and whose sons became standout football, basketball, and baseball players in their own rights — was a fantastic athlete from the start.
And that some washout athletes are very lucky.
John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history (FolkloreCycle.com).
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