If you've always been a strong student, spending your time and money on education pays well. The evidence is overwhelming. Even after scrupulously correcting for ability bias—the brains, discipline, and other advantages you'd possess with or without school—formal education provides a big career boost. At an individual level, investing in your own education often compares favorably to not just corporate bonds, but long-run stock market returns.

Since individuals' investment in their own education is personally rewarding, you might infer that government investment in society's education would be socially rewarding. But this is a classic "fallacy of composition." If one person stands up at a concert, he sees better; it does not follow that if everyone stands up at a concert, everyone sees better. The same goes for education. Yes, schooling is selfishly lucrative—at least for strong students. On a societal level, however, it is shockingly wasteful for students weak and strong. Federal, state, and local government spends far too much money educating Americans.

The conventional case for government subsidies assumes that all of education's career gains come from building what economists call "human capital." A worker gets more education; his productivity and income go up. A nation gets more education; its productivity and income go up. If human capital is the truth, the whole truth, and nothing but the truth, education is a path to individual and national prosperity: Education makes the pie bigger, so every worker can enjoy a bigger slice.

Unfortunately, human capital is far from the whole story. Most of the personal benefits of education arise not from improving on-the-job productivity, but from convincing employers that your on-the-job productivity is already good. Economists call this "signaling."

The truth is mixed, of course: Education as it actually exists blends crucial training in literacy and numeracy, which yields real skills, with thousands of hours of hoop-jumping to impress future employers. Selfishly speaking, this hoop-jumping pays. But socially speaking, it's a waste. Only one worker can look like the Best Worker in the Country, and only a quarter of workers can look like the Best 25 Percent.

When education isn't making the pie bigger, bigger slices for some necessarily mean smaller slices for others. As signaling's share of the value of education rises, education becomes an incinerator that burns society's money, time, and brains in a futile attempt to make everyone look better than average.

Solid Selfish Benefits, Modest Selfish Costs

At first glance, education's selfish financial benefits look enormous. High school grads outearn dropouts by 30 percent, and college grads outearn high school grads by 73 percent. But the true benefits are smaller than they look: High-ability people spend extra years in school, and the labor market independently rewards ability as well as education. As a result, some of what we call the "rewards of education" are disguised "rewards of ability." My best estimate is that just over half of the apparent premium is genuine.

Of course, that's just over half of a big number. But merely enrolling in school is no guarantee you'll capture it. About 25 percent of high school students fail to finish in four years; about 60 percent of full-time college students fail to finish in four years; and about half of advanced degree students never finish at all.

This is a vital caveat, because most of education's payoff comes from graduation—the so-called "sheepskin effect." If you spend three years in high school but then drop out, the labor market treats you only modestly better than someone who never started high school; if you spend three years in college and then drop out, the labor market treats you only slightly better than someone who never started college. Of course, the stronger your academic ability, the more likely you are to cross the finish line and win the prize.

What about education's costs? Despite common complaints about high tuition, it's the foregone earnings—the money students could have been making if they weren't in school—that dominate. Public K–12 is, of course, tuition-free. And while the price tag can be shockingly high at elite schools, the typical student at a public college pays far less than list price.

A Decent Deal for the Individual

Investors routinely measure assets' rate of return—how the investment's cost compares to its ultimate reward. What happens if we evaluate education in the same way?

T

he answer, to be brutally honest, hinges on your academic ability. Consider four archetypes. The Excellent Student, by definition, fits the profile of the typical master's degree holder; whether or not he actually has a master's degree, he has the same potential as the average person who earned one. The Good Student, similarly, fits the profile of a typical B.A. holder who does not continue on to graduate or professional school. The Fair Student fits the profile of the typical high school graduate who does not try college. And the Poor Student fits the profile of the typical high school dropout. Ideally, "fits the profile" is all-inclusive, covering cognitive ability, character, background, and every other trait.

Selfishly speaking, how does education measure up? High school provides a very good personal return. It's worthwhile for almost any student who wants a full-time career after graduation, and the decision to drop out is usually a mistake. Even Poor Students can reasonably expect handsome rewards.

College, by contrast, is only a solid deal for the academically inclined. When they start college, Excellent Students should foresee a 6.5 percent inflation-adjusted return—about as good as stocks. Good Students should foresee a return near 5 percent, or about as good as corporate bonds—not a no-brainer, but a sound investment nonetheless. Largely due to their high failure rate, however, Fair Students should expect a low 2.3 percent return on the same investment—and for Poor Students, the return is a paltry 1 percent.

Admittedly, even strong students often end up with subpar returns. Those who want to financially protect themselves should follow three simple rules: First, pick a "real" major. Science, technology, engineering, and math obviously count; so do economics, business, and even political science. Second, go to a respected public school. It probably won't charge list price, and even if it does, you'll get your money's worth. Third, toil full-time after graduation. Working irregularly after finishing college is like failing to harvest half the crops you plant. The same rules naturally boost returns for weaker students, too, but not enough to tip their scales in favor of college. They would still generally be better off investing their time and money elsewhere.

Low Social Benefits, High Social Costs

The selfish return to education hinges on compensation: How much pay do you forfeit while you're in school, and how much extra pay do you capture after you finish? The social return to education, in contrast, hinges on productivity: How much stuff does society forfeit while you're in school, and how much extra stuff does society capture after you finish?

Most researchers avoid the latter questions by casually making the extreme assumption that compensation and production are equal. Maybe education raises hard skills, maybe it raises soft skills. But it's all human capital, they say. After all, employers won't want you if you're paid more than you produce and can't get you if you're paid less than you produce.

If signaling is part of the story, in contrast, compensation and production are only equal on average. When your credentials match your ability, your productivity matches your pay. Otherwise, however, pay and productivity diverge. A Good Student with a B.A. earns what he produces. If the same student goes straight to work after high school, however, the market doesn't merely pay him less; it pays him less than he produces. Why? Because his lack of a college degree makes him look worse than he really is. If the Good Student gets an M.A., similarly, the market pays him more than he produces, because his credentials make him look better than he really is.

Thus, to calculate education's social value, you must know why education raises pay. If it's solely by raising worker productivity, society's gain equals the individual's gain. If part of the value of education comes from signaling, though, society gains less than the individual does. True, the economy is more productive—and society richer—when employers can tell which workers are good and which aren't. But once student rankings are out there, the social value ends. The pool of knowledge about worker quality would be essentially identical if everyone had one less credential.

So what's the true breakdown between human capital and signaling? A cautious path is to hand signaling full credit for the sheepskin effect—the benefits from graduating—but no more. This implies a signaling share of 38 percent for completing high school, 59 percent for a bachelor's degree, and 74 percent for a master's degree.

More plausibly, though, part of the ordinary year-to-year return on education (and not just the return from finally earning the diploma) comes from signaling as well. An extra semester in school may not say a lot about you, but it says something. Multiple approaches—curriculum tabulation, studies of credential inflation, and estimates of national returns—suggest that 80 percent is a reasonable estimate of signaling's total share.

At the same time, workers don't receive the full benefits of their education: When someone's income goes up, his taxes do as well—and his draw on government coffers goes down, since he's not eligible for as much assistance. From a social point of view, this tips the scales in education's favor.

But what about costs? Even economists who put no stock in signaling concede that education's social costs exceed its selfish costs, because students don't pay the full price of their education. Taxpayers fully subsidize K–12 schools, heavily subsidize public colleges, and partially subsidize private colleges. Sifting through the messy numbers, a reasonable bottom line is that one year of public education costs society $11,165 per high school student and $8,279 per four-year college student.

All this educational bean counting can admittedly come off as annoyingly narrow. Normal human beings take a more holistic approach, asking, "What kind of society do we want to live in—an educated society or an ignorant one?" If education fosters a dynamic, inclusive, secure, well-governed community, they suggest, shouldn't we do everything in our power to foster educational excellence?

Normal human beings score a solid point: We can and should investigate education's broad social implications. But that is a poor excuse for discarding what we already know. Evidence on education's social effects should supplement, not supplant, evidence on its narrow effects. In any case, looking at the big picture is no excuse for innumeracy. If education curtails murder, that is an argument in its favor. But we still need to ballpark (a) how much the extra education costs, and (b) how many murders it prevents. Instead of scorning bean counters, we should scrupulously count beans of every description.

One leading holistic argument goes like this: Heavy investment in education fertilizes society's creative potential by giving everyone the mental tools to innovate. Selfishly speaking, the quest for new ideas is quixotic; if you ever hit on the idea of a lifetime, copycats will probably gobble up most of your profits. Yet socially speaking, using education to spur innovation is hard-headed realism. If consistently investing 10 percent of national income in education elevates the annual economic growth rate from 1 percent to 2 percent, the social rate of return is itself a hefty 10 percent.

Selfishly speaking, educational hoop-jumping pays. But socially speaking, it's a waste.

Unfortunately, this stirring sermon is wishful thinking. Macroeconomists, to their dismay, have failed to find an unambiguous effect of education on economic growth. It's not clear that education increases countries' living standards at all, much less that education makes them increase at a faster rate. If you can't tell if your machine moves, you may safely assume it's not a perpetual motion machine. Researchers who specifically test whether schooling accelerates progress have little to show for their efforts. Individual benefits are real, of course, but gains for some are mostly offset by losses for others.

The argument that education benefits society by curtailing crime rests on firmer ground. About 65 percent of American inmates never earned a standard high school diploma. Around 15 percent of white male dropouts and 70 percent of black male dropouts spend some time in prison by their mid-30s. These rates are roughly two-thirds lower for men who finished high school and miniscule for college grads.

Still, as usual, there is less to schooling than meets the eye. Correcting for IQ and grades makes education look mildly less effective at preventing crime. The game changer, though, is personality: Future criminals, like future dropouts, are impulsive, aggressive, and defiant. When researchers correct for early antisocial attitudes and behavior, education's measured effect on crime plummets. An extra year of education cuts expected lifetime jail time by less than one week, and reduces the probability of serving any time behind bars by just one-half of one percentage point.

Yet there's a subtler reason to dial down estimates of education's pacifying power: signaling. Education can defuse individual criminality while having little impact on society's criminality. Hand one delinquent a high school diploma and he looks better to employers, relative to his peers. This boosts his legal income, making crime less attractive in comparison. But if you hand every delinquent a high school diploma, the credential loses its worth. It no longer boosts legal income, leaving crime as attractive as ever.

A Bad Deal for Society

Social returns hinge on the power of signaling. The higher signaling's share of the value of education, the lower education's social return. As you near pure signaling, the social return falls to zero and even goes negative—we're spending time and money on credentials that don't make us any more productive.

Let's explore the two signaling scenarios we touched on earlier. Recall that the cautious approach was to treat all sheepskin effects as signaling, but everything else as human capital.

In this scenario, social returns are mediocre to ruinous. Even Excellent Students should expect to yield society about 4 percent of its investment for high school, 2 percent for college, and –3 percent for a master's. As ability falls, so do returns: The corresponding figures for Fair Students are 3 percent, 0 percent, and –6 percent. (Male Poor Students are the only significant outlier here: The youthful crime rate among this cohort is so high that the marginal reformatory effect of high school remains socially rewarding.) These low returns are the rule even though education provides an array of good things to society as a whole. All the computations grant that education boosts worker productivity and workforce participation and that it cuts unemployment and crime. Nonetheless, the value of the combined benefits is meager.

And there's a problem with this cautious signaling scenario: It's actually too cautious. If we switch to my preferred estimate and assume signaling accounts for 80 percent of schooling's benefits instead of just the sheepskin effects, the results are beyond bleak. Social returns are low for every level of academic difficulty and every level of student ability. Sending Poor Students to high school yields a wretched 0.2 percent return, and every other educational investment is in the red.

To repeat, this does not mean schools don't improve their students. They do. But it's a long walk for a short drink. As a rule, society fails to earn back what it spends putting kids through high school, college, or beyond. At the current margin, education's numerous social benefits pale before its staggering social cost.

How can social returns be so low when selfish returns are often substantial? Because signaling is a redistributive game, serving individuals a larger piece of the pie without enlarging the whole. As a result, schooling is collectively harmful even when individually helpful. You might be tempted to ask, "How can there be too much schooling if schooling is lucrative?" But that's like asking, "How can there be too much air pollution if cars are convenient?" When your choices harm bystanders, what's best for you and what's best for mankind can diverge.

Most listeners are willing to accept that education is largely wasteful signaling. But when I suggest that we should waste less by cutting government spending on education, popular resistance kicks in. You would think conceding the wastefulness of education spending would automatically entail support for austerity, but it doesn't. The typical reaction is to confidently assert that education budgets should be redirected, not reduced.

Such confidence is misplaced. The discovery of wasteful spending does not magically reveal constructive alternatives. Prudence dictates a two-step response.

Step 1: Stop wasting the resources.

Step 2: Save those resources until you discover a good way to spend them.

Not wasting resources is simple and speedy. Don't just stand there; do it. Finding good ways to use resources is complex and slow. Don't just do it; think it through. Fortunately, you can apply saved resources anywhere. Time and money wasted on education could pave roads, cure cancer, subsidize childbearing, cut taxes, or pay down government debt before our fiscal day of reckoning arrives.

Most libertarians dream of a voucher system, where schools are private but funding is public. Yet to my mind, vouchers—and "school choice" more generally—are only a marginal improvement over the status quo. Since education is mostly signaling, the chief problem is high quantity, not low quality.

America's schools, like its sports stadiums, are white elephants. The main drawback of massive government investment isn't that the white elephants are poorly managed or uncompetitive; it's that they're far too numerous and lavish. Government should leave both industries to the free market, viewing mass bankruptcies not as market failures but as market corrections.