The Higher Education Bubble: Not Bursting Yet

In previous posts (e.g., this one, this one, etc.) I've questioned the benefits of higher education and speculated that it might be the next debt-fueled sector to see its bubble burst. Not just yet, apparently, according to this front page article in today's Financial Times. Excerpt:

Americans are going back to school, choosing to sit out the worst employment market for 25 years in colleges, universities and business schools in the hope of better job prospects when times improve.

A spike in higher education enrollments has shown up this week in earnings announcements from companies in the otherwise hard-hit media sector, whose education divisions have far outperformed their better-known news brands.

On Friday, the Washington Post disclosed a further $89m in quarterly losses from its flagship newspaper and a $5m loss from Newsweek, its news magazine. By contrast, its Kaplan higher education division saw profits up 74 per cent to more than $70m.

The article goes on to give other examples of media companies' education divisions cleaning up, including the example of Pearson (the parent company of The Financial Times) which runs the NY Institute of Finance, among other educational ventures.

The Top Earning Degrees

A CNN Money article today lists the most lucrative undergraduate degrees (see the graphic above) and notes that, unsurprisingly, they all require math skills. A couple of thoughts on this. First, take a look at the first and third highest-paying degrees (petroleum and mining engineering, respectively). I've argued in the past for the economic benefits of facilitating more domestic natural resources production (e.g., here and here). One of the benefits I've noted is that natural resources extraction tends to create a lot of high-paying blue collar jobs. As this CNN article notes, it also creates high-paying professional jobs, which is another benefit.

Consider the benefits to California, for example, if it dropped its opposition to expanding offshore drilling. For one thing, it might improve the state's environment by reducing natural oil seepage. It would also generate much-needed royalty revenue for the state (in fact, the state could capture that revenue up front by issuing revenue bonds backed by those future royalty income streams). In addition, how many jobs would it create for petroleum engineers and oil rig workers? Couldn't California use the additional net tax payers and potential home buyers these workers would represent?

Another thought: given that the fifteen most lucrative college majors require math aptitude, does it make sense that the SAT has reduced the relative weight of its math section in the total SAT score from one half to one third (by adding an equal-weighed essay section to the math and verbal sections)?

Seven NYC Valedictorians

The Metro section of Sunday's New York Times featured brief profiles and a group interview with the seven NYC valedictorians pictured above ("In Uncertain Times, Valedictorians Look Ahead"). The print edition of the paper had the above photo on the front page of the section, and another group photo on p.6, where the article continued. The second group photo listed SAT scores and other info for each of the valedictorians. I showed Cheryl the first photo and asked her to guess which kids had the highest and lowest SAT scores, respectively. She guessed them both, based on the names and photos.

From the article,

These seven valedictorians — the five from public schools ranked highest in their class; Mr. Monsalve and Adrienne Edwards of the elite Spence School were selected to give the valedictory — are a tableau of American ideals¹. Four are from immigrant families — Uzbekistan by way of Armenia, Colombia, the Dominican Republican and Lebanon. Their parents include an elevator mechanic, two hotel banquet servers and a limousine driver, along with the chairman of the neurology department at Mount Sinai Medical Center. They speak Spanish, French, Russian, Arabic, a little Hebrew.

Like all good New Yorkers, they bemoan the subway system, the hordes and the city’s willful indifference to personal boundaries.

Although these young men and women all bemoan the subway system, none of them plans to do anything about it when they grow up: none plans to be a civil engineer, urban planner, politician, or work in another field where one might try to improve it. I find it interesting, too, that the writer notes the valedictorians all bemoan "the hordes and the city's willful indifference to personal boundaries". Something tells me that if a non-New Yorker expressed similar sentiments, a New York Times reporter would take offense.

Look at the profile of the young woman second from right:

ADRIENNE EDWARDS

LIVES IN St. Albans, Queens

COMING FROM Spence School, 49 seniors

GOING TO University of Pennsylvania

HOPES TO be a litigator

SAT SCORE 2160²

Outspoken and assertive, Adrienne commuted 90 minutes by bus and train to Spence, where she enrolled in 7th grade and was head of the hip-hop dance group and the multicultural awareness club. “I don’t think I’ll be able to function at my highest anywhere else but New York because I’ve met all my challenges and had all of my progressions here.”

Might Ms. Edwards be a nominee for the Supreme Court in 2040?

The photo above, of, from left, Jenae Williams, Jordano Sanchez, Adam Sealfon, Kristina Arakelyan, Christian Monsalve, Adrienne Edwards and Muhammad Safa, accompanies the article and is credited to Béatrice de Géa.

¹At the risk of seeming picayune, am I the only one who finds this sentence poorly written? I think what the writer is trying to say is that two of the seven valedictorians (Monsalve and Edwards) tied for that top honor at the same school. She could have explained that clearly and simply in a brief parenthetical comment.

²These scores include the new SAT essay section. Unlike the SAT, the GMAT, which also has an essay section, lists the essay score separately: test-takers can earn a maximum score of 800 points on the objective, standardized test portion of the GMAT (the part schools care the most about) and on the essay section, get a separate score of 0-to-6, which is the average of the subjective assessment of two readers. The GMAT's approach makes more sense, in my opinion. Adding the score of a subjectively-graded section to the scores of two objectively-graded sections, as the SAT now does, seems to muddy the waters a bit.

Intelligence, Education, and Earning Power

In a couple of recent posts (e.g., "Lessons from Brooklyn's New Economy" and "An Atypical Perspective on Health Care in the NY Times") we touched on the politics and economics of education. An article in the business section of Sunday's New York Times, a somewhat fawning profile of Google executive Marissa Mayer (pictured above) included a brief, tangential bit of candor on the subject ("Putting a Bolder Face on Google"). The main responsibility of Ms. Mayer at Google is controlling the "look and feel" of the company's search engine, but the article notes that she also has personnel responsibilities:

At a recent personnel meeting, she homes in on grade-point averages and SAT scores to narrow a list of candidates, many having graduated from Ivy League schools, whom she wanted to meet as part of a program to foster in-house talent. In essence, math is used to solve a human problem: How do you predict whether an employee has the potential for success?

How indeed. Why would Ms. Mayer, who holds a masters degree in computer science from Stanford, be interested in the SAT scores of college graduates? Presumably, because SAT scores are a more objective measure of intelligence than a college degree or grade point average, since the later two can be distorted by admissions preferences and grade inflation. This suggests some problems with President Obama's "college for all" initiative. Some advocates of education as tool for economic advancement seem to confuse the correlation of education and high earning potential with causation. Many high-paying employers (such as Google) demand highly-intelligent knowledge workers. The law since Griggs v. Duke Power restricts the use of broad aptitude tests, so employers often rely on other indicators of intelligence, such as SAT scores, or diplomas from elite schools (that generally require high SAT scores).

What would change if college degrees became as common as high school diplomas? Presumably, the use of college diplomas as a proxy for intelligence would decline, and employers would look more closely at SAT scores, or demand a higher degree to replace the signaling function of a college degree (e.g., jobs that now require bachelors degrees might require masters degrees). That would be a boon for the education industry, but it's unclear how it would help the average American worker increase his earnings potential.

I suspect that the focus among elites in government and punditry on the potential of higher education as a ladder to economic advancement is partly the result of most elites having gone to exclusive private high schools, where virtually all of their classmates were relatively bright and college bound. Had more elites gone to public high schools, where not every student was on a track to college, there might be more skepticism in public policy discussions about the broader utility of higher education.

The photo above accompanied the NY Times article.

Update: for the benefit of new readers of this post, I am now blogging at Steam Catapult and Shadow Stocks.

Lessons from Brooklyn's New Economy

This week, the New York Times published an interesting article on the burgeoning culinary movement in Brooklyn, one similar to the movement led by Alice Waters¹ and others in Berkeley, California, in the 1970s ("Brooklyn's New Culinary Movement"). There are some broader political and economic issues related to this story that the article doesn't touch on, which I try to touch on below.

The article described how a number of Brooklynites were building viable businesses and creating livelihoods for themselves. Conspicuously absent was the role of formal education in most of this. The butcher learned his trade from an apprenticeship of sorts; the ricotta cheese makers learned that craft on a trip to Italy; the chocolate-making brothers were mainly self-taught, etc. Since education is one of President Obama's three main policy foci, it would be good if he or his aides took note of this, but I doubt they will, for a couple of reasons. The first is because of the extent to which the Democratic focus on education is about feeding the educational industry, and the second is because I doubt many of Obama's aids (or outside advisers) have ever done the sort of thing these Brooklynites are doing: building businesses from scratch. That lack of hands-on experience leads to blind spots among our elites, both in the public sector and in the corporate sector.

That's a thought I had considered writing a post on a few months ago, but I'll make the point here instead. There's been speculation in recent months about how some of the catastrophes that combined into the financial crisis could have happened on the watch of some of America's best and brightest, in big business and government. In a recent New York Times column, Ben Stein, drawing on his experience in the Nixon White House, speculated that most of the best and brightest weren't that bright. He wrote that most of the men he worked with in Washington were B+ types, with the exceptions of two he considered to be geniuses, Henry Kissinger and Paul O'Neil. Others in recent months, including Atlantic blogger and Harvard alumnus Ross Douthat, have blamed the arrogance of Harvard-educated elites. I suspect the lack of hands on experience in closer-to-the ground businesses is partly to blame. Relatively few alumni of Harvard or other elite schools go into these sorts of businesses, as they tend to have lower-risk, lucrative job opportunities in big business, consulting, etc.

Attitudes toward debt and leverage are one example. Most small businessmen I've known are inherently cautious about both². The New York Times article doesn't give much detail on how these culinary-related businesses are financed, but what details it does give suggest an aversion to getting over-extended with debt (e.g., the chocolate-makers paying the designer of their packages in chocolate bars and deciding to let their business "evolve" rather than trying to grow it more quickly). The academic perspective on leverage (at least for public companies), up until recently, was different³, and of course there was no shortage of elite university grads at highly-levered Wall Street firms.

The image above, from the article, gives you an idea of the sort of ethnic diversity you can find in many gentrifying New York City neighborhoods.

¹In doing some research before writing this post, I came across this related essay (which I don't entirely buy) by John Schwenkler: Eat Republican: How an organic movement born in Berkeley exemplifies conservative values.

²In lending businesses, some amount of leverage is necessary, but the owner of a local non-traditional lender for whom I've done some work explained to me that his business is usually levered less than 3-to-1: far less than most commercial banks, let alone investment banks. He also takes a more hands-on approach to asset-backed lending than some of his counterparts in big Wall Street firms, e.g., driving out to a retail property backing a note and watching its foot traffic, etc.

³The academic perspective on this always struck me as counter-intuitive. In an NY Institute of Finance class a couple of years ago, for example, the instructor, a veteran CPA and CFA, lectured that it was a bad thing for a company to have a lot of cash on its balance sheet (because that dragged down returns on equity). He said that a company flush with cash it couldn't put to use ought to use it to buy back its stock, and then lever up and buy back some more stock. Of course, companies that followed that sort of advice in the last couple of years haven't been well served by it, while companies holding net cash may now have some attractive opportunities to put it to use in a depressed market.

An Atypical Perspective on Health Care in the NY Times

Last month, the New York Times Magazine published a sprawling cover article by David Leonhardt on how the Obama administration might "remake" the American economy ("The Big Fix"). One of Leonhardt's arguments was that the U.S. spends too much on health care, often without commensurate results, and in his article he suggested spending less on health care and more on education (this view seems to be gaining traction on the left). Despite the length of his article, Leonhardt didn't offer much by way of empirical data in support of his claim about the limited benefits of health care spending or the potential benefits of spending more on education (his argument in support of more emphasis on education included this observation, "The two most affluent immigrant groups in modern America — Asian-Americans and Jews — are also the most educated," without addressing any of the obvious questions that observation raises).

Last Sunday, the New York Times business section offered a different perspective on health care spending, from William Hawkins, the CEO of Medtronic ("The Boss: For Medtronic’s Chief, Success That Hits Home"). Excerpt:

Advances in technology enable us to do things today we weren’t able to do years ago, such as monitoring and managing patients remotely. Twenty years ago when we implanted a defibrillator, it cost $100,000 and wasn’t nearly capable of the performance of today’s devices that are a fraction of the cost.

My family has also been a driving force behind my journey. I have a photo in my office of three of my relatives. My father, 83, has eight coronary stents, some of them ours. My 91-year-old uncle, an injured World War II veteran, suffered from a tremor for years that made his hands shake. When he was 89, doctors implanted one of our deep brain stimulators, which controls movement. When they turned it on, for the first time in 40 or 50 years his hands stopped shaking and he got his life back. My father-in-law, who is 86, has a Medtronic heart valve, stents and a pacemaker.

One of the reasons I’m working is to make sure I can take care of my family so we can enjoy a long life together.

It sounds like Mr. Hawkins's relatives have gotten some positive results from their health care spending. Would we really be better off as a country if that money were thrown into the latest sisyphian federal program to improve public education instead?

The image above, of the deep brain stimulator, is from Wired.