The Future of Success (26 page)

Peer effects among school-age children are significant—a fact that parents of teenagers will hardly find surprising. High-school students are more likely to go to college when more of their classmates are college-bound.
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And whatever their level of ability, students do better in groups more able than they, on average, and worse in groups less able, although the process isn’t symmetrical. Students of less ability are helped more by being together in classrooms with students of greater ability than the more able are hurt by being combined with the less.
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New evidence strongly suggests that such childhood peer effects extend beyond schools to the communities surrounding them. After a random sample of poor inner-city families received housing vouchers that enabled them to move to higher-income suburbs, their children’s behavior improved relative to children in families who wanted the vouchers but lost out in the lottery.
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Here too, the sorting mechanism is becoming far more efficient. Wealthier and more ambitious parents are choosing highly regarded private schools or good public schools in tony suburban communities where other students are likely to exert a positive influence, troublemakers can be easily extruded, and slower learners are quietly isolated. (“Tuition” for a good public school in a wealthy neighborhood is, in effect, included in the purchase price of an upscale home there, and the corresponding property taxes.) Or they choose publicly funded “charter” schools with more leeway than public schools about whom to admit or expel. In most states, charters have little room explicitly to exclude or expel, but they can craft their offerings in such a way as to deter less desired students, for example by failing to offer services for children with learning disabilities or admitting children only from the surrounding upscale neighborhood. (A recent study of charter schools in Michigan found that most of them excluded students who were especially costly to educate, such as those requiring special-education services; charter schools in many of the most affluent school districts refused to accept applicants from outside the district boundaries.)
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The same mechanism explains the upsurge of private “parents’ foundations” in the wake of court decisions requiring richer school districts to subsidize poorer ones. Rather than pay extra taxes, parents are quietly shifting their support to these charitable enterprises, thereby keeping more of their money in the home district. Already about 12 percent of the more than 14,000 school districts across America are funded in part by such foundations,
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paying for everything from a new school auditorium (Bowie, Maryland) to a high-tech weather station and language-arts program (Newton, Massachusetts).
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“Parents’ foundations,” observed the
Wall Street Journal,
“are visible evidence of parents’ efforts to reconnect their money to their kids.”
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And not, it should have been noted, to kids who are needier and more costly.

As a result of all this sorting, poorer children who require a lot of attention from good teachers are increasingly bunched together with other poorer children who also need a lot, within schools that have relatively few resources to begin with.
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It shouldn’t be surprising that parents in poor communities tend to favor school vouchers, because vouchers at least give them a means of separating their children from troublemakers who use up even
more
of the scarce time and attention of teachers, and who exert the worst influence on their own kids. Schools in a voucher system are freer to expel children who are particularly unruly. Parochial schools have always had that option, which partly explains why poor kids who attend them do better on standardized tests than poor kids in the public schools. The aggressive use of “zero tolerance” codes of school behavior makes the extrusion of troublesome children all the more common. Where do all these children go? They’re bunched together at the bottom of the entire educational system in schools that are essentially custodial institutions. If the children are too unruly even for these precincts, they may end up in juvenile detention centers. The sorting mechanism is complete.

No one designed the educational system this way. Well-meaning parents think of their reliance on private schools, good public schools in upscale communities, charter schools, local foundations, or school vouchers as means of obtaining as good an education as they can afford for their kids—not as means of excluding children more costly to educate than their own. But in fact, these individual decisions add up to a large-scale sorting mechanism. And once under way, the mechanism has its own momentum—as is strikingly clear in California, which in the 1960s had been among the heaviest spenders on public education per pupil and had one of the best school systems, yet now spends among the least and has one of the worst. As residents segregated into richer and poorer communities, the poorer schools began to deteriorate. After Proposition 13 placed a cap on local property tax rates in 1978, and a court decision required rough parity in spending across districts, California moved to pool educational funds statewide—transferring tax dollars from rich towns to poor. This lessened the educational payoff to better-off parents of choosing a wealthier town in which to live, so they began sending their children to private schools and withdrawing their support from the public school system. As a result, overall public spending on education dropped, and almost all public schools began to deteriorate.

In the emerging economy, success will depend most on talent, ingenuity, the ability to sell oneself, and connections. The quality of a child’s early education and the character of the child’s community are centrally important in these respects. Yet with ever-increasing efficiency, the sorting mechanism is separating children according to the communities and the schools their parents can best afford. Individual parents are acting rationally, but what’s rational for individuals is not necessarily rational for society as a whole. Nor is it the outcome we might choose as citizens concerned for the future of the nation.

UNIVERSITY SORTING

Say you’re a bright high-school senior, considering college. Twenty years ago your sights would have been on the best university in your state, perhaps your region. Now you’ve got far better comparative data about national colleges, starting with
U.S. News
’s ratings and a flood of information over the Internet. Besides, your state university may no longer offer the cheapest deal. State support for higher education is no longer as generous as it used to be (we’ll come to the reason later).

This shift toward a national (and in many respects a global) market in higher education has put all colleges and universities into more direct competition with one another. In order to maintain or enhance their reputations, they’ve got to attract the smartest young people from around the nation, even the world. They, too, have more and better information about high-school stars. And as competition for these stars intensifies, colleges are offering them more lucrative scholarships.

Parents of the stars are wising up and conducting bidding wars similar to those conducted by prized employees. Carnegie-Mellon University explicitly encourages star applicants to bring back offers from other colleges so that it can match or surpass them.
We’ll beat any price!
Harvard makes the same offer more delicately, as is Harvard’s wont: “We expect that some of our students will have particularly attractive offers from the institutions with new aid programs,” it writes its new admits, “and those students should not assume that we will not respond.”

But as a result, there’s less scholarship aid left over for needier students. “Need-blind admissions”—by which universities admitted applicants according to merit, and made sure that anyone who got through the door received enough financial help to stay—is fast disappearing. More of the scholarship aid is now going to the best and brightest. “It used to be, providing aid was a charitable operation,” says Michael S. McPherson, president of Macalester College in St. Paul. “Now, it’s an investment, like brand management.”
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This means that students who are especially talented, well organized, and motivated are clustering more than ever together in the same prestigious universities. Their chances of doing well in life are already high before entering college. The clustering further bolsters their prospects of success. Not only are their talents and ambitions mutually reinforcing, but their wealth of contacts and connections provide the whole group with access to even better job opportunities. And as they cluster together, the prestige of their university brand grows steadily higher. Young people who are somewhat less disciplined, motivated, or capable of doing well on standardized exams attend “second-tier” universities, and their experience reinforces those almost-but-not-quite-good-enough inclinations and connections. And so on down the line. (As noted in a previous chapter, however, university rankings don’t perfectly correlate with the talent found in any given institution of higher education. And some of the best small universities are establishing reputations for excellence in particular niches, to which world-class faculty and students are attracted.)

The trend has been gathering momentum for several years. What’s new is the efficiency of the sorting mechanism. Fiercer competition on both sides—prospective students seeking admission to the best universities, and the universities seeking out the best students—is resulting in an ever-greater concentration of talents and abilities. This helps explain why inequality of earnings is rising even among college graduates.
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RISK SORTING

One traditional function of a community was to spread the risk of misfortune among its members. All contributed against the possibility that any single one might be in particular need. By the early decades of the twentieth century, it was assumed that nations as a whole should provide all their people with social insurance. Every American citizen would “receive old-age benefits direct from the insurance system to which he will belong all his life,” said Franklin D. Roosevelt of the system he was signing into law. “If he is out of work, he gets a benefit. If he is sick or crippled, he gets a benefit.”
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But the sorting mechanism is eroding social insurance. To understand why, you need to understand two basic things about your incentive to insure yourself and your family: First, the reason you buy insurance—either privately, from an insurance company, or publicly, through tax payments to the government—is that you don’t know whether or how much you’ll be needing it. If you knew, it wouldn’t be insurance; it would simply be the specific cost of whatever you anticipated needing, like a new car every five years. Second, the amount you actually pay to be insured—your premium or your tax payment to cover the cost of the insurance—corresponds to the average riskiness of everyone within the group to be insured. As long as every group reflects roughly the same mix of more or less risky individuals, or the group is a national risk pool like Medicare or Social Security, the cost to you is about the same. You can’t get a better deal, so you have no incentive to shop for one. Inevitably, then, people on whom fortune smiles end up subsidizing the people on whom fortune scowls. To the extent that fate is random, this seems only fair.

Absent strong social bonds, your incentive to contribute to an insurance pool will erode if you believe the likelihood that you’ll need to draw from it is significantly less than the likelihood someone else will. “Welfare,” as originally conceived in FDR’s plan of social insurance, was for mothers whose income-producing husbands had died. As such it was popular, because the misfortune could happen to almost any family. But when welfare began to be seen as income support for unmarried mothers, a large portion of whom were black, the program no longer seemed like insurance. It looked more like a handout to the “undeserving” poor—who appeared even less deserving as more married mothers of young children had to get jobs. Political support for welfare dried up, and welfare shriveled.

Broad-based social insurance programs remain popular with the elderly (witness the quadrennial political grandstanding about Medicare and Social Security), but the wealthier and healthier are having second thoughts. Many are beginning to see that they can get a better deal by joining together and leaving the poorer and sicker behind.

Selfishness isn’t the new force at work here. It’s technology, which is revealing more about one’s riskiness. For example, the genetic codes carried within your cells can reveal the odds that you’ll develop any number of life-threatening diseases. Your family history—how long your parents and grandparents lived, and what they died of—reveals more information. And the way you live your life—the kind and amounts of food you ingest, how active you are, where you live, your income, your education, your personal habits and addictions—can be analyzed to provide still more specific information on the odds that you’ll get sick, have an accident, or otherwise invite misfortune. In short, it’s no longer the case that you and the community that insures you are in the dark about your chances of needing to be bailed out. The odds can be known with increasing precision.

The sorting mechanism for insurance operates exactly as it does with social services and education: The best deal is one where your dollars don’t subsidize anyone riskier than you. Americans spend tens of billions of dollars a year insuring their health and their lives in the private insurance market. Insurers who compete for this business have every incentive to “cherry pick,” pursuing people with lower risks and charging them lower premiums. As more and better information becomes available, such people—who tend to eat better, get better medical treatment, have higher incomes and better educations—will be charged progressively less; people with higher risks—the converse in every respect—will pay more, and the gap in price will widen.

The sorting mechanism is already slicing up private health insurance. Health maintenance organizations (HMOs) actively market themselves in wealthier suburbs and to high-paying companies whose employees are also less likely to need a lot of costly medical care. Employers, meanwhile, are narrowing or dropping coverage of their lower-paid and more risky employees even as they enhance coverage for their most valuable. Rather than continue purchasing group health insurance to cover all its employees, Xerox announced at the end of 1999 that it would give its employees vouchers to buy their own—a move that will cut Xerox’s costs and also end the implicit subsidy of higher-risk employees by the lower-risk. And as many large companies that used to offer all their employees group health insurance continue to downsize and subcontract their operations to smaller companies, the only employees remaining within the parent-company group insurance plans are core managers, who are generally wealthier and healthier than the rest.