This morning I meandered along memory lane by glancing through some photo albums I maintain in Apple’s iPhoto app. I was surprised to note that nearly eight years have passed since I spent a week traveling in Finland with our son, Andrew.
Finland is a country close to my heart. I spent two years in the mid-1970s living and teaching there. I love their language, culture, customs, and general hospitality, which is markedly reserved, like much of New England.
Despite its small size (just 5 million people on a planet of 7.3 billion) Finland has given the world many things, including sauna, Nokia phones, Linux, Angry Birds, and Jean Sibelius. Perhaps the number one aspect of Finnish life most talked about around the world today is its education system, typically considered the best on earth.
By law, colleges and universities in Finland charge no tuition. This is true regardless of whether a student is a Finnish national or holds a passport from any other nation, and regardless of whether the level of schooling is a bachelor’s, master’s, or doctorate degree. Education is considered a human right, and the basis of a fair and balanced society.
Finland, along with its Scandinavian neighbors, enjoy a high rate of college educated citizens. They also can boast of possessing among the lowest income inequality and the highest upward mobility in the world.
This leads us into our topic of the week, namely, President Obama’s drive to make college education more accessible and affordable for all Americans. This policy objective is proposed within the context of strengthening the middle class.
Bountiful economic evidence supports the notion the middle class has been shrinking as a result of changes in digital and computing technology. Those with the educational skills required to benefit from the new technologies have faired better in the economy than those who lack such skills. Education is then touted as a cure for the growing income inequality.
It is doubtful many would argue against the wisdom of offering advanced education to everyone who desires it. This initiative has obvious social merit and yields numerous positive consequences, but how will it effect income equality?
We can approach this question various ways. One powerful tool for examining the effectiveness of a proposed solution to any problem involves the use of the fallacy of composition.
As we have discussed in past columns, the fallacy of composition informs that what is true for one may not be true for all. For example, I am sitting in the ball park and need to get a better view of the grand slam home run. So I stand. In standing I see better. Then everyone stands. Now I see worse than if we had all remained seated. Standing is therefore not a good solution to a global problem, since it will only work for a few.
By way of economic illustration, consider Abenomics, named for the current Japanese prime minister, Shinzō Abe. When Abe was reelected in December 2012, he took aim at public economic enemy number one, namely low spending resulting from high savings, negative population growth, deflation, and an aging population.
One of his solutions to inadequate aggregate demand involved increasing spending from abroad. Abe implemented monetary policies which caused the value of the yen to drop from 1.3 cents per yen in 2012, to about 0.84 cents per yen today. This has made Japanese products in the rest of the world cost much less, thereby increasing spending within Japan by people outside of Japan.
The policy, as expected, has worked well for Japan. The value of Japanese exports measured in yen has increased since the yen has deteriorated. It is as if they stood up at the stadium and can now see better.
As it turns out, most developed nations currently suffer from a lack of spending, the U.S. included. Is currency devaluation a solution which can be applied universally? No, it is mathematically impossible for all countries to devalue at the same time.
One country can devalue its currency if and only if another country or countries experience an appreciation of their own money. If every country were to try this approach, the problem of inadequate spending might be made worse through inflation, which would likely follow from a world-wide devaluation.
Thus, this aspect of Abenomics is not a very useful world solution. It works for one but not for all.
Now, how about education as a cure for income inequality? Education statistics inform us that on average, greater education leads to better jobs and higher pay. This is true for the individual, but will it bring higher wages to all if everyone is better educated? Will income inequality diminish through greater access to higher education?
I would answer that such an outcome is highly doubtful. One very likely outcome may work as follows:
If we add to our so-called “skilled” labor force, through increased education, more workers will compete for the “skilled” jobs that require the advanced education. This will allow corporate owners to pay less for the better jobs, since more workers will apply for each skilled job.
Skilled wages will thus diminish, leaving corporate owners with even greater profits than they currently command.
The problem we face is easy to see. Whether all of us have advanced degrees or not, we still need someone to check us out at Hannaford, serve our table at King Eider’s Pub, stock shelves at Renys, and drive our kids to GSB. We still have many, many jobs that do not require a college education, but are essential to our well-being.
Even more damaging to the theory that greater access to education will lower income inequality comes from the Organization of Economic Cooperation and Development database. According to the 2014 OECD publication of “Education at a Glance,” the U.S. already has a greater portion of its adult population holding college degrees than Finland, and the rest of Scandinavia.
In fact, we have one of the highest levels of advanced education in the OECD; just a bit behind Canada, Israel, Japan, and the Federation of Russia.
The difference between the U.S. and Finland is not one of education, so much as it is one of social outlook. In Finland one job, required by the economy, is considered as honorable and important as another. After all, jobs are performed by people and each person is important.
Thus, the laws and customs regarding pay in Finland reflect such. This type of thinking is as foreign to Americans as pidä hauskaa ja näkemiin.
Now I am getting a bit homesick. I should never have meandered along memory lane with iPhoto. Another trip to my beloved Finland might cure the ailment. Does anyone want to come?
Next week we will take a glance at the Fed and see what is going on there.
(Marcus Hutchins, MA, M. Phil, Economics, Columbia University, NYC, is a former economist, treasury bond arbitrage trader and hedge fund manager. He retired to Southport in 1997 where he resides with his wife Andrea and his youngest daughter Abbey. He welcomes feedback at coastaleconomist@me.com.)
