Americans: Let’s stop investing in our kids

I attended a social gathering this afternoon with a lot of folks whose children had recently graduated from college. The kids had gone to lavishly funded Massachusetts public schools or expensive private schools, soaking up at least $200,000 in funds for their first 12 years of education. Then they’d spent at least $300,000 in parental money and opportunity cost (not working) for four years of college. Each child, therefore, represented at least $500,000 of investment. What was the return on that investment? Nearly all of the kids were unemployed and living at home with their parents.

Consider the alternatives. The $500,000 could have been invested in Pizza Hut franchises in China, mobile phone towers in India, or supermarkets in Brazil. With a 10 percent return on investment, not atypical in these high-growth countries, the money spent to educate an American child could be yielding $50,000 per year in income. http://en.wikipedia.org/wiki/Personal_income_in_the_United_States shows that this is about the same as the average American with a master’s degree earns. Of course, our uneducated children would still be able to perform some paying work, so their total annual income would be well in excess of $50,000.

Just as we’ve produced a health care system so expensive that we’d be better off without doctors and hospitals, we’ve managed to create an education system so expensive and ineffective that we’d be better off not sending anyone to school.

[Note: We would not have to have invested in foreign countries to come out ahead; http://www.moneychimp.com/features/market_cagr.htm shows that had we put money into the S&P 500 starting 16 years ago we would have realized a 7.8 percent annual return on investment.]

27 Comments

  1. Jagadeesh Venugopal

    June 12, 2010 @ 5:41 pm

    1

    Coming from a foreign country, one thing that amazes me is the creature comforts in the universities. From free condoms to 24×7 cafeterias and luxury dorms, these things add nothing to the quality of education, but do ensure that the “students” have a great four years, at the cost of slaving away for 20+ years to pay back the loans.

    In India, I lived in pretty simple (verging on nonexistent) accommodations for four years, but finished college with about $1000 (equivalent) in debt. Granted, the education I got may not be comparable to the better US universities, but still, I’m grateful to not carry a crushing debt load.

    I wonder if it would be possible to provide students spartan accommodations, and cut out every last thing not related to academics. In return, fees could be reduced due to the savings from not spending on these luxuries.

  2. wilbur

    June 12, 2010 @ 6:14 pm

    2

    Plus, think of the extra money we would have selling off all the property and assets now held by colleges and universities! Brilliant!

  3. James

    June 12, 2010 @ 7:25 pm

    3

    I was lucky, I beat a college tuition hike and was able to work my way through college. I landed a job and shortly thereafter started a business which broke even for about three years.

    But, now I’m back at home, it’s just a rotten landscape for small business. Not much opportunity, and when there is, there is fierce competition with little ethics to back it up, so in a sense. I do agree with you. Large Corporations should pay for training. Forget the educational institutions. Make the corporations pay for it.

    When I went through college they did have a “placement program”, but it was lottery with no guarantees. I think if Corporations want “talent”. They should have to pay for it.

  4. Jamie Clark

    June 12, 2010 @ 8:08 pm

    4

    @davewiner cites brilliant/cranky Philip G: “Let’s stop investing in our kids.” Any real data on employment ROI of good-vs-bad schools? Hmm.
    http://twitter.com/JamieXML/status/16037592205

    Hey, if Slumdog Millionaire kids really do as well as my preppy, I could save some big tuition bucks. But are you so sure? #dadof14yrold
    http://twitter.com/JamieXML/status/16037687129

    Link to Dave’s cite: http://twitter.com/davewiner/status/16035479091

  5. Ben

    June 12, 2010 @ 11:00 pm

    5

    I marvel to think how the universities survived the 70′s and 80′s, considering how low the tuition was. They must have really had to scrimp and cut corners to get by. Glad to see they’re now collecting according to the true costs involved, so they are no longer forced to make such compromises. It was truly a national disgrace. Why, our President suffered through college in those dark ages, and it was only due to his own pluck and hard work that he managed to get a decent education at all from such an underfunded system. Today’s students sure are lucky.

  6. Josh Volchko

    June 12, 2010 @ 11:09 pm

    6

    Jagadeesh, you may not have the “education” of a high-caliber university from the US, but, I think in Phil’s big education reform article he would argue that most of our Ivy League-level schools are worthless for giving students their first four years of post-high school schooling anyhow. Also, the vast majority of us went to pretty average schools which still cost a pretty penny.

    I personally went to a fairly small school with old, spartan (e.g., pre-1950s) dorms that gave us heat in the winter and plenty of places to plug stuff in at. Once I graduated, they started knocking down half of the old ones and rebuild those plus a number of new ones which are far more ridiculous that what’s needed for school. I lived in the dorms for 4 years because they gave me a reason to go outside and experience college. I’m betting even with how much I paid per year (housing cost more than tuition + books), it’s doubled by now. The alternate for kids in a college like mine would just be to get three other friends and live in a house rented through a Realtor, for about 1/10th the price per person. All of this for 3 whole hours of classes a day. Woo. Gimme 8 hours of classes three days a week for a year and a half (summer included) and we’d be set.

    To James: I know the corporation I work at, while not large by any means, is big enough that if you give a good reason for taking a training course (even in the likes of New York City), they’ll pay the money for it and you’ll probably learn as much in 1 week as you did all semester in a CS class. Our one buddy who went to a community college, while this mocked by some people, probably made the wisest decision among any of us working there now; he “missed out” on two years of school and probably knew just as much as we did going into the job.

  7. Vipul Saxena

    June 13, 2010 @ 2:18 am

    7

    While I think the post was in sarcasm, the message is abundantly clear. The cost of education is prohibitively high without an appropriate ROI in most cases.
    The argument I hear from people in academia is that
    academia is a very labor intensive industry,
    3/12 months its assets are not utilized,
    legacy costs,
    non-profit academia is a social service.

    All these points are valid, however we cannot deny that academia and healthcare have been sheltered from the true forces of globalization as other industries have not been. It is imperative that non-profit educational institutions try to rationalize and optimize their operations in order to reduce their costs. In most cases they have a pretty decent product.

    Most institutions are attempting to do that, however they face a lot of internal resistance to change.

  8. M. Edward (Ed) Borasky

    June 13, 2010 @ 3:06 am

    8

    Philip, have you seen this: Glenn Reynolds: Higher education’s bubble is about to burst | Washington Examiner http://meb.tw/aKG6FG

    I suppose I could be cynical and buy put options on the companies that stand to be hurt when the bubble bursts. ;-)

  9. Ben

    June 13, 2010 @ 3:13 am

    9

    What would be an even better ROI would be if we leased our children’s labor out to companies, and they could spend all that time they’re wasting in school earning us money. We could house them in barracks and feed them a mix of corn, nutritional supplements, and antibiotics. Awesome! [/strawman][/slippery slope][/sarcasm]

    But seriously, I have a few problems with this idea:

    1) Talking about our children’s lives in terms of ROI is an indication of some profoundly unhealthy thinking.

    2) You’re throwing the baby out with the bathwater. It’d be as if you said, “our health-care system is totally messed up, therefore germ-theory is bogus.” At a conference I recently attended on teaching children with learning differences, one speaker, Johnathan Mooney pointed out that the twentieth century was spent perfecting a nineteenth century educational model while the last hundred years of education research has resoundingly proven that said model does not actually work. So, from an educational theory perspective, the fact that our schools are not serving children well is no surprise. This doesn’t mean we should stop educating our children, or – more generally – investing in them, it means that we need to figure out how to implement the kind of staggeringly profound reform necessary to bring our educational systems, and indeed our entire social and economic infrastructure, up to date with our current understanding.

  10. Babak

    June 13, 2010 @ 3:49 am

    10

    This is the stupidest “idea” I’ve read this week. Education, in other words, the distribution of science, is the underpinning of all advancement for our civilization. It is the reason why you have a cell phone, a computer, the internet, blogging software with which to spread inane “ideas”, etc.

    Education is not a simple variable to plug into a discounted cash flow model. Not everything is about money. I’d much rather invest in my child than in a franchise any day.

    But even if we do take your perspective, rather than trashing education, why not look around the world to find a better model and implement it? Same goes for health care. The US is, after all, the only developed country in the world without universal health coverage.

    But don’t let us rush you. I mean, after all, you’re still on the imperial system of measures…. along with… Burma and Liberia – while the rest of the world moved on to metrication a long time ago.

  11. James

    June 13, 2010 @ 3:57 am

    11

    The claim in your followup note is false. http://www.moneychimp.com/features/market_cagr.htm from 1993 to 2009 shows an after-inflation annualized return of only 5.1%.

  12. Eric Halfby

    June 13, 2010 @ 4:40 am

    12

    And how would a totally uneducated, illiterate adult manage a $500k investment portfolio?

    > We would not have to have invested in foreign countries to come out ahead; … had we put money into the S&P 500 starting 16 years ago we would have realized a 7.8 percent annual return on investment.

    Would the S&P have returned anything like that, with no skilled/educated workers to keep those corporations running?

  13. Andres Kievsky

    June 13, 2010 @ 4:42 am

    13

    Yet another reason why education must be public, secular and free.

  14. Jack

    June 13, 2010 @ 5:56 am

  15. philg

    June 13, 2010 @ 8:30 am

    15

    In reverse order..

    Jack: Thanks for the ycombinator link. I guess one of the side effects of learning to become a programmer is reading everything literally.

    Andres: Education in the U.S. is mostly public and free. But it still represents a huge investment by Americans collectively.

    Eric: How would an uneducated adult manage a $500k portfolio? Most of the investment that is made in America’s children is done at the public level, e.g., with publicly funded K-12 schools. So I think most likely the government would decide it needs to manage the money (as indeed the Norwegian government manages the big fund they’re accumulating from their oil revenues). As for the kids being illiterate… the average American child would probably be sufficiently motivated by the household computer to learn to read and type. Could the S&P 500 run without young people who’d been to K-12 and college in the U.S.? A lot of the S&P 500 profits come from operations in foreign countries, staffed by foreigners. Those would continue unaffected. Some American kids might be flown to countries with excellent education systems, e.g., South Korea, and return with globally competitive skills obtained at a reasonable price. Finally there are always immigrants, of which the U.S. is planning to accept perhaps 100 million between now and the year 2100.

    James: I did not use the inflation-adjusted returns on that S&P 500 calculator because education expenses have been growing much faster than the CPI.

    Babak: Africans make minimal investments in education and yet they have cell phones, computers, the internet, and blogging software. If a country cannot produce a good efficiently it should import goods rather than produce them domestically. The U.S. can no longer produce college graduates efficiently.

    Ben: Your idea that American governments could study what foreigners are doing and replicate it here seems to be contradicted by experience. We are bankrupting ourselves with health care expenses, for example, rather than copying what countries that spend a sustainable percentage of GDP on health care do. Our massive non-profit organizations don’t seem to adapt any better. Faced with competition from University of Phoenix and other innovators, for example, the existing universities, equipped with hundreds of billions of dollars in capital (Harvard alone had $40 billion at one time!), decided to do… exactly what they’d been doing for the previous 300 years.

    Ed: I linked to that Glenn Reynolds article a week ago: http://blogs.law.harvard.edu/philg/2010/06/07/the-bursting-of-the-higher-education-bubble/

    Vipul: I don’t know why you conclude that existing U.S. educational institutions “have a pretty decent product”. 22-year-olds fresh from 16 years of education are being rejected by employers. Given that 22-year-olds usually enjoy perfect health, have far more energy than older workers, and are seldom distracted from their work by marriage or child care, the fact that they aren’t being fought over by employers indicates that something went very badly wrong during those 16 years of education (which cost about $500,000).

  16. brett bazant

    June 13, 2010 @ 10:32 am

    16

    Well the service technically is so much cheaper than what is paid. Trust Americans to learn how to pay ten times more than something is worth, and then come to think of it as ‘essential.’ The notion that more expensive is therefore better is helping toppling their society. Ironic that education is the current topic, given that a small amount of correct education would end this stupidity. To rent the space, to pay for teachers and curriculum, when spread out around many students, that is not an inherently expensive operation.

  17. philg

    June 13, 2010 @ 11:07 am

    17

    Brett: I think that you are neglecting the fact that most teachers are public employees. Even if all schools were shut down tomorrow, and all payroll expense went to zero, the U.S. would still spend a huge amount per capita on education. We would be paying for unlimited health care and inflation-adjusted pensions for retired public school teachers and administrators for the next 60 or 70 years. Remember that at the time of General Motors’s bankruptcy, they were paying pensions to retired workers as old as 115.

    Merely because we were able to do things in the past doesn’t mean that we can continue to do them in the future. For example, at one time we could comfortably afford to build highways. Given that the cost of government-run construction and maintenance has grown so much faster than inflation, economists now estimate that we won’t be able to afford to maintain our existing highways and will need to let many of them revert to weeds.

  18. Chris

    June 13, 2010 @ 11:59 am

    18

    I did my undergrad at a top-tier Canadian school, and my grad work at a top-tier American school. The difference in amount of money was like night and day.

    The Canadian school was always scrounging for money, wherever they could. When they got money, it was spent very carefully, since it was precious. Most of the buildings were older than my parents. The students held giant protest rallies when tuition was increased from $2k/year to $4k/year — since it was now possible that the money earned in a summer job could no longer pay for an entire year’s tuition. Many (most?) students paid for their education not through loans, but by earning the money as they went along. By keeping the tuition low enough to make this possible, students got an extra education on money management. They were not faced with gargantuan debts where “just another $100″ would look like a drop in the ocean.

    The American school spent money like it was going out of style. They pay for airfare and hotels to lure in prospective students. New buildings get dropped on campus yearly. Brand new student center, with luxury gym facilities, free towel service. Free pizza at all grad student seminars. Disposable cardboard trashbins and recycling bins filled campus every fall to avoid re-using dirty plastic ones. Multiple weeks of lavish parties to welcome new students to the program.

    Now this could be the difference between an public university and a private one — but my personal impression is that there is a _lot_ of waste that can be squeezed out of the American system.

  19. Vince

    June 13, 2010 @ 1:16 pm

    19

    I have a couple of points to add:

    These anecdotal posts about the inability of recent college graduates to find jobs merely confirms what we read in the newspapers: the economy is in a bad recession and it’s currently hard to find a job. The situation will probably improve in 2 – 3 years. It’s sometimes called the business cycle.

    Also, the K-12 school systems perform a function other than education – adult supervision of children. If you eliminated the schools, parents would have to pay for some sort of day care, so you wouldn’t save that entire $200,000 per kid. I don’t have kids, but I’ve heard that quiality day care can be pretty expensive.

  20. lucas rockwell

    June 13, 2010 @ 1:30 pm

    20

    America (and we are not alone) is in a race to the bottom. Just like Coke and Pepsi spend more an more each year on advertising, just because the other does the same, doesn’t mean then are making that much more in profits each year. The same can be said for education and health care: Costly perks need to be added because “the other guy is doing it”, and in the end, we just pay more for (mostly) what we had before. Seriously, has basic calculus changed so much in 30 years? ;-)

  21. Ted

    June 13, 2010 @ 2:34 pm

    21

    This is a wonderful post. The message comes across loud and clear: children who received the “best education money can buy” are seemingly no better off immediately following college than contemporaries, and money sunk into education might have yielded higher returns in more traditional investments. This is very possible. Sadly the experiment isn’t over yet though since it is also possible that such children are prone to being late bloomers — once they get on their feet, the years of expensive education pays its dividends. To determine the true return on investment, we may need to wait their entire lifetimes.

  22. philg

    June 13, 2010 @ 4:30 pm

    22

    Vince: “business cycle” enthusiasts said, back in December 2007 when the U.S. economy entered a recession “it’s just the business cycle and things will be okay in 2-3 years”. I don’t think the 15 million folks currently unemployed would concur. The U.S. has never recovered from a serious recession in an environment that remotely resembles today’s, i.e., one with fully fledged Internet and container shipping. Experience from past recoveries may not be applicable.

    The entire world is not in a recession, in any case. Brazil, China, and India are growing rapidly, for example. If the $500,000 that we’ve invested in each child has made our kid valuable, you would think that companies in Brazil, China, and India would recognize that and try to hire these kids. But as far as I know, this is not happening on a large scale.

    As for day care being expensive.. there are still a lot of stay-at-home parents. Daycare for infants is indeed expensive, but older kids could probably get apprenticeships as they did in the old days.

  23. philg

    June 13, 2010 @ 4:34 pm

    23

    Ted: You sound like an Artificial Intelligence researcher whose experiments have yielded no results for 30 years… just wait another 30 years and people will see the value in this stuff. If the education has no value while it is still fresh in the graduate’s mind, I don’t see why it would suddenly develop value 25 years from now (in any case, an investment return that doesn’t arrive for 25 years must be heavily discounted). It is possible, of course, that today’s crop of graduates will head to the public library and to Wikipedia and educate themselves enough to get a job, but when they do we shouldn’t credit their 16 years of formal schooling.

  24. Derek K. Miller

    June 13, 2010 @ 7:17 pm

    24

    Oh yes, measuring our children in terms of money is a great way to look at them, just great.

    Phil, what has the ROI on your dogs been over the years? They cost a lot of money to raise, feed, groom, and care for, and they’re not bringing in any dough in the end. All that puppy training and they still live at home without their own jobs. Jeez, what a waste!

  25. philg

    June 14, 2010 @ 3:20 am

    25

    Derek: There are some differences between society’s spending on education for human children and society’s spending on pets. First, most of the spending on education is done with tax dollars; most of the spending on pets is done by private personal choice. If we are going to confiscate 50 percent of a worker’s paycheck through payroll taxes, sales taxes, property taxes, excise taxes, local income taxes, state income taxes, federal income taxes, tariffs, higher food prices generated by import quotas, etc., should we not have to provide that worker with an explanation of why government is spending his money more wisely than he would have?

    Second, there is no evidence that sending children off to be bored out of their skulls for 6 hours/day makes them better companions at home. In fact, the average 5-year-old who has never been to school is a lot more enjoyable to have around the house than the average 15-year-old.

    Third, I don’t know that there is good evidence that parking kids in lectures where they will sit passively teaches them much. Throughout human history the best educated folks seem to have had a combination of private tutoring, parental guidance, and self-study. We’ve spent more money than any other society in history trying to change that, but perhaps the college graduates coming back to live at home indicates the experiment has failed.

    Fourth, there seems to be much better evidence for the value of dog ownership than there is for America’s school system. As noted earlier, people voluntarily pay for pets and pet care, which is itself evidence of value. Epidemiologists have found that dog ownership results in lower blood pressure and other measurable signs of improved health. Most of us could use more exercise and a dog encourages us to get outside and walk, run, or bike.

  26. Jordan Walker

    June 14, 2010 @ 8:59 am

    26

    It seems to me that education has only become more expensive with the introduction of federal oversight. Phil, do you think the government could balance the budget if they closed the Department of Education as an unsuccessful venture or his my logic flawed?

  27. philg

    June 14, 2010 @ 9:55 am

    27

    Jordan: Closing the then-new Department of Education was a big goal of Ronald Reagan that he could never get Congress to agree to. Despite the fact that the department educates no students and produces no curricular materials (you’d think that they would at least fund some open-source textbooks for K-12 but they don’t) they are going to spend about $160 billion this year (http://www2.ed.gov/about/overview/budget/index.html ). http://blog.heritage.org/2010/02/05/past-deficits-vs-obamas-deficits-in-pictures/ shows that the federal deficit is about $1.5 trillion, so closing up the non-educational Education department would get us only 10% of the way there. Even eliminating the U.S. military would not close the current deficit.

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