What Kind of “Trade” Is Higher Education?
My baby at his high school graduation
I’ve always thought of higher education as an investment, whether one with a financial ROI or something more intangible for society. But as the mother of two college-aged sons, the “mal-employment” trend for graduates, explained in this PBS NewsHour video, hits home.
- In the first eight months of 2010 fewer than 50 of every 100 B.A.-holders <25 years of age held a job that REQUIRED a college degree.
- For the college grads who are employed, 7 of the most prevalent 20 jobs they held did not require a degree.
- More grads <25 years old work as cashiers, retail clerks, and customer service representatives than computer professional professions and all types of engineers combined.
- Twice as many worked in bars and restaurants than as engineers
- More worked in offices and as bank tellers than as computer professionals
Can you say double macchiato?
The Project on Student Debt organization’s report on 2009 college grads (devastating timing, kids) shows they have an average debt of $24,000 with rising default rates; it’s worse if they went to a for-profit college.
Long tail effects of youthful unemployment
The Economic Policy Institute reports (my emphasis added):
But this recession has specific qualities that reinforce this problem for young workers. Most important, the bursting of the housing bubble resulted in the loss of around $5 trillion in residential wealth. With plummeting home values and shrinking 401(k)s, many people lost a significant portion of their planned retirement. For example, the median household with a person between the ages of 55 and 64 saw their wealth fall by almost 38% between 2004 and 2009 (Baker 2009). In the face of such a loss, many older workers chose to delay retirement and either continue working or go back to work because they could not afford to retire. The size of the labor force declined by 6.3% for young workers, but it increased 8.5% for workers 55 and older. Not only are there fewer jobs in the economy, but also fewer workers retiring and opening up positions…
Moreover, a downturn in the youth labor market is particularly worrisome because it comes at a critical time for workers. Work during teen years is characterized as being highly path-dependent—work status in one period is very sensitive to work status in the time period before. Individuals with more work experience are more likely to work. Sum et al. (2008) have shown the importance of high school employment on post-high school employment and concluded that those who do not work in high school were more likely to be completely disconnected from the labor market. This is an intuitive conclusion, as those with work experience have both shown basic jobs skills and benefited from human capital investment, such as training, that make them more attractive for further work. With a dramatic downturn in the young adult labor market, fewer young workers are being incorporated into this path.
A momentum or swing trade?
We’ll know if negative ROI on higher ed is an actual trend in the future. Perhaps it’s a microtrend or just a blip. But it seems to me that we’re not being honest with ourselves when we say higher ed is THE path to economic prosperity.
Fed Chairman Ben Bernanke missed the point in this response to a 60-Minutes question about the gulf between rich and poor in this country. Ahem, Dr. Bernanke, you’re an economist, if every person in America had a Ph.D there still wouldn’t be enough jobs — even menial ones — to go around!
My co-author of Tradeoffs, Matt Davio, and I talked about this trend. He’s a professional trader and views an investment of time and money in an education as a swing trade. I also see a possible fit with momentum trading and so-called value investing.
What say ye? Is a college education an investment? Or is it just a pricey weigh station for young adults to wait out the meltdown? What kind of trade DID higher ed resemble and what kind DOES it now?
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Hi Tamela,
I’d lean towards labeling it pre-market prep. It’s the bare minimum one must do in constructing a plan…without it, one has virtually no chance at success. With it, one has no guarantee of success. And sometimes, an idea comes out of left field that compels you to drop your plans in following a new blueprint…see Michael Dell or Bill Gates,etc.
For most of us, it’s being exposed to new ideas, new connections, and learning how to prepare but make decisions on our feet.
I would say my higher education resembled a margin called swing trade. I did learn, but it was expensive and I only thought I had a plan. Come to find out the plan was unrealistic.
I think higher education resembles a position or swing trade. It will take time to mature, and the ups and downs along the way could very give you a margin call or bankrupt you. But in the long run, the pay off is great and the risk is worth it.
If you drew a diagram demarcating the rich from the poor, who would be better educated?
Is it a terrible waste if someone with a college degree waits tables? That’s how things are in NYC. So much education so few people holding jobs requiring education. But so much talent there as well. The arts especially (never was there a greater economic loser) and the appreciation of the arts.
But how on earth will we fill positions for professionals without education … doctors, lawyers, engineers? Astrophysicists, mathematicians, teachers? So many students begin college without knowing their major. They discover ‘what they want to be’ during the process of education.
18 is too young to give up learning. And too young to lose one’s mind.
You might be interested in the work of Richard Vetter, an economist who argues that both subsidies and artificially cheap credit for college are contributing to this unfortunate trend. Apart from the credentialization of everything, which so often requires the higher ed “signal,” it’s not clear that a college degree has that much value in the marketplace. Higher ed subsidies are also contributing to a “revenue-to-cost spiral.” http://www.popecenter.org/acrobat/revenue-to-cost-spiral.pdf But labor supply and labor demand are pretty unyielding. To justify college anymore, you have to take a long term view.
That said, I’m not sure what is to be done. We have fetishized higher ed to such a great degree. There is some blowback from the entrepreneurial class, however:
http://www.thielfoundation.org/index.php?option=com_content&view=article&id=14:the-thiel-fellowship-20-under-20&catid=1&Itemid=16
Anyway, nice to come across your work, neighbor. I do miss Charlotte.
Derek, I like “pre-market prep” as a label. that said, I often think we Americans would be better served in the whole and as individuals if we had some kind of required national service BEYOND military service. Something that young people could do like the Civilian Conservation Corps (CCC) that my grandfather served in. This would give participants an idea of how the world works, an exposure to trades & professions, and instill in them the value of service (to both themselves and society in general).
Beyond its usefulness to young people, a CCC-type program would help the unemployed and our country’s crumbling infrastructure. We have Americans going on THREE years of unemployment insurance who are running up their diabetes sitting around eating pretzels while watching un-edifying TV shows but who would much rather be doing something and should frankly be doing something to earn their keep. Meanwhile trash piles up along the roadsides, libraries can’t afford to stay open, etc etc etc.
Thanks for your thoughtful response.
Joshua,
Thanks for the response. Do traders typically expect a higher ROI on certain types of trades? In other words, if you’re a swing trader, should you be getting a premium over a scalper (for example) given the same cost of money?
Tam
Barb,
Thanks for weighing in.
I totally “get” your answer. It’s better for society for people to have a broad education, whether credentialed or otherwise. With that in mind, I wonder what you think needs to change about higher ed?
Costs are so high relative to the job market; would you make it less the individual’s responsibility to fund or do you see another solution?
What do you think about the states rationing programs? For example, in NC the 16-campus system could say, “We’re graduating 5000 psychology BS degrees every year, of which 500 go on to graduate school and 3200 are unemployed and 1000 of them are in default on their student loans; therefore we’re only going to allow our system to admit 1500 psych majors every year and these two campuses will house the programs instead of the existing 12 that do today.”
It seems to me that middle class kids today view college as the thing they’re supposed to do despite the of lack passion for truly learning or having an idea of how they’ll put all that education to use in their lives. They seem to just be putting in their time until they “figure it out.” My 22-year-old son believes he just needs to get a BS in something/anything and then plans to figure out his life’s path. He thinks he’ll probably need a master’s in SOMETHING to get a “real job” but has no passions. I think he should do a city year or something in the volunteer arena (see my comments in response to Derek).
So sad…
MAX! What a pleasant surprise hearing from you after all these years! How’d you find me?
These are great articles. And I agree with “fetishized higher ed…”.
Thanks for sharing.
I actually did a couple of video entries on this years ago …
http://www.youtube.com/watch?v=PhFS88XP4U0
as well as part II
http://www.youtube.com/watch?v=NtyKPiPlc9U&fmt=32
Higher education … especially for the people who really need it? Is a INCREDIBLY awful trade
D
Thanks, Dan.
What KIND of trade is it, although it turns out awfully in your opinion? Lots of trades go south — what KIND of trade is higher ed?
My own approach is … how do I put this? Metaphorically, I think “Wolf Larsen” had the right approach to education (though obviously not when it came to a firm understanding of ethics … :^) )
As I mentioned in the video entries, personally … I see an extended locked in / increasing cost basis with very little, if any reward. If I were asked to give it an anecdotal subjective “from-the-realms-of-Dans-mind-which-means-precious-little” risk reward ratio? I’d place it at 3 risk to 0.5 reward.
There is debt. When someone attends college, basically, on average, they are going into debt. Financially, in a great recession / crisis that was brought on by a credit bubble – debt is the absolute worst thing to take on your personal balance sheets. In addition, any adverse change in the credit markets (and we are at the end of a credit bubble) can adversely affect a Student Loan. Unfortunately, and somewhat obviously, most potential college students are not aware of this inherent flaw.
Scholarships are often used as a counterpoint to this issue: But scholarships are for the upper scholastic tier, and if you leave college for whatever reason, many times, you then owe the money regardless. So you’re locked into a long term decision, to go into debt. There are exceptions to this of course, but on average, you are going into debt.
And quite frankly, educational standards today are … abysmal, at best. Academia as it exists reduces your free time to pursue subjects that are relevant and important to you, they restrict personal expression, and there are many FREE alternatives, that cost nothing (Institutions on the web such as the Khan Academy are becoming more and more popular)
As RSA pointed out: We are in the midst of changing Educational Paradigms …
http://www.youtube.com/watch?v=zDZFcDGpL4U
Dan
PS – So as a trade? I see a 3 risk to 0.5 risk / reward ratio, on a locked in position trade. The worst of all possible trades out there.
I dont think so Tamela. Money Management is/should pretty much the same no matter how you trade.