Thursday, May 29, 2008

The Price to Earnings Ratio of a College Degree

P/E ratios are used to determine whether an investment is worth the money. In the case of a stock you take the price per share and divide it by its earnings. Thus you get a chart like this one showing us the S&P 500 P/E ratio over time

Applying the P/E concept to other assets can be helpful as well. If you look at a house, a house can be considered an investment. You buy a house and rent it out for This gives us the housing version of a P/E ratio, the "house price to rents" ratio.

But along with 401ks and housing, the good overlords at the government and your employer's HR department are ordering you to invest in something else. Education.

Have you bothered to look up what the P/E ratio is for a college degree?

You haven't?

Well, you're in luck. The old Captain has!

Now before I go on you all better darn well appreciate this. This took about 2 hours to put together because the NACE (the source for starting salaries) is REAAAAALLY stingy with their data. So I had to go and search out each individual year at third party sites. Also inflation data for tuition rates is somewhat hard to come by. So if you want to say "thank you" to the Captain go buy my book for a paltry 99 cents and contribute to the Kindle Experiment.

First the data.
Doesn't look like much does it? Well that's because your ole Captain is intellectually honest and didn't want to "scale the y axis" to make this chart look more dramatic than what it is. But he doesn't have to. That chart IS dramatic and let me explain.

The above shows you the "price" you pay for college (tuition) versus the earnings you get from a college degree (earnings). As recent as 2000 you could expect your tuition to cost about 11% of your starting salary. Today in 2011 it is expected to be 16%.

At first you may say, "hey, that doesn't sound like a lot," but keep in mind two simple things.

One, you don't go to college to get a job. You go to college to make MORE MONEY when you get a job. Ergo, the above chart is somewhat misleading because without spending the money (and time) going to college, you would still make some money because you could presumably work anyway. So to be very precise when calculating a college degree P/E ratio it really should be your tuition costs divided by the earnings premium you would make over just having a high school diploma. Regardless, the price is going up.

Two, this chart speaks nothing of the drastic increase in the number of unemployed youth. If we were to incorporate all the "$0" starting salaries many of you recent college graduates are experiencing, I think you would see a DRAMATIC increase in the college degree P/E again suggesting you aren't getting your bang for your buck.

But still, I don't have to rely on adjustments or theoreticals to make my point. I'll simply present another chart. A chart showing the increase in tuition costs versus the increase in starting salaries. In theory if we index these together and start at the same point, they should increase at roughly the same rate, correct?

Well looky there kiddos! In just the past decade tuition has gone up nearly 100% while the starting salary (of that absolutely "necessary" sheepskin in "11th Century Middle Eastern Feminist Gender Studies") has only gone up in value by about 30% (and let's not forget about how that's essentially a 0% real increase when we account for inflation!)

So let me explain to you young kiddoes out there who voted for "hope and change" and thought Barack Obama's Magic Unicorn would miraculously fart out jobs for all of you.

You've been had.

You've been scammed.

You've been cheated.

And this has been done to you by not only my generation, but the generation before that.

Understand you weren't the only ones who came up with the brilliant diabolical plot of majoring in some wishy washy subject and then secretly hoping to get a cushy, overpaid government job. No, many people before you majored in "education" or "sociology" because they too "wanted to help the children" (while deep down inside we all knew all along it was just to get summers off and avoid calculus). There's two whole generations before you that had the same idea. And guess where people who major in "philosophy" or "hypenated American studies" end up working?

You got it.

Teaching you kiddies in college.

Of course, along with social security and medicare, this is just another little generational racket they have going on the side. See, they've told you since you were little ones you needed a college education. What they failed to tell you was in what.

You know all those "nerdy" Asian kids and square American boys you laughed at with their "stupid" chemical engineering degrees? Yeah, that's what you should have majored in.

But you see, if everybody majored in chemical engineering then the older people (who had the exact same idea you had) wouldn't have jobs. Remember, they majored in English and anthropology too. They have masters degrees in "sculpture" and "theater." And since they couldn't find jobs in the private sector they had to create entire studies out of whole cloth in....

(are you ready for it?)

(can you guess where these people go?)

(are you sure?)



Studies that don't produce anything of value to society, but can be sold to easy marks like you!

So let me explain to you what's happening and why you are sitting there with an over-bloated student debt (that no doubt I'm going to have to bail you out of). You see, in society STUFF OF VALUE has to be produced. You can't just major in Socialism Unicorn Farts or Political Science like your beloved hope and change leader (oh, wait, he was a professor too, wasn't he?). In the end for society to thrive, let alone survive, you must produce something of value. As I talk about in my seminar on worthless degrees, take out a sheet of paper, list everything you would like to buy or own and the list the degrees of your friends and ask yourself;

"Do we major in the fields that is necessary to produce the I-Pads and X-Box's and cars we want?"

The answer is no. This also explains to you why we have a trade deficit with China.

But also understand you are on the receiving end of what has been a trans-generational scam. Creating "fake" industries so people can have hobbies instead of creating real industries so people may have wealth. Notice the charts below. These charts I discovered when trying to find data going back to the 1940's (because ideally it would be great to calculate the above charts and see what the P/E ratio was for a college degree back then, but the data is just not there). What you'll notice is that sure, under your parents or grandparent's generation a college degree would help, by about the 70's in terms of real dollars there was no upshot. Matter of fact when you look at the liberal arts degrees they were simply a waste (also notice how they didn't start until 1962, gee, I wonder why? Could it be..ummmm...hippies?)

But why the push for college then? Why were you told to go to college? And why didn't anybody tell you about worthless degrees? Two fold.

Most of your parents didn't study economics, let alone see these charts. They just remember their own experiences and the advice at the time was hardly wrong. It's just there's a SEVERE ignorance when it comes to economics in this country and people just plain didn't know. But now we get to pay for it.

And second, lets not forget about all those burnt out hippie professors that need your hard earned money (or your parents money or the taxpayers money) to pay him to lecture you about the evils of capitalism in a "Peace Studies" program.

So in the meantime kiddies, I hope you enjoy you little sheepskin there. I hope you enjoy "going green" by recycling or reusing grocery bags or whatever else you were told to do by your indoctrinators. Because in the end, no matter what you were told, no matter what you believe and no matter how much you may have been programmed to hate it, reality wins in the end. And the reality is you just got scammed out not just your money, but a sizeable chunk of your youth and your future is bleak. And no amount of naive childish "hope and change" is going to fix it.

Enjoy the decline!


Anonymous said...

))))) Common sense is not allowed among the politically correct elite.

YOU should be ashamed of yourself for suggesting that the YOUTH actually get a University degree in something that could lead to a JOB.

Get a Degree --And the Gov't will be forced to create a JOB for you.


Anonymous said...

I don't know about down in the states but I do know here in my part of Canada, I think there is a whole generation that doesn't have one clue what real life entails. Most of all earning your keep. I hear "when is supper ready" from a decent twenty one year old to his mother almost like clockwork every day. While hes sitting in the basement,sneaking bong hits and playing with his equally life skilled disabled girlfriend. he wants his dream job of Urban Planner and more power to him but I get the feeling sitting in mom's basement insulated from what life really costs might seem more attractive. He's only been out of college since mid April, tried for one position, never got it and seems content at that. He's not alone, and it isn't entirely his fault his mom's been easy one him, and he's not my kid and at his age life's going to bring the lesson home as it always does. Your right but future generations are in for a big surprise and I hope my two girls (16 and 19)both part time employed, each own there own car, one two years thru University to be a nurse the other last year of high school are prepared to at the very least voice their opinion let alone shoot when the spoiled lost "adults" come screaming for their entitlements. Maybe it's just me, and maybe I'm wrong but parents have forgotten they won't be around forever, and many have failed to instill the old time tested values in their kids and I think that may be the majority up here in the part of Canada I live in.

Anonymous said...

Hello Aaron,

I wrote out a long comment and attempted to log in via google. I was thrown into a Blog creator, which wanted me to create a blog. When I backtracked, my intended message was lost.

Not good.

Anonymous said...

The OP is great. There is one thing that is not true, though. It is in this line:

"This also explains to you why we have a trade deficit with China."

Mark Matis said...

For Anonymous at 5:27 PM:
This is a fairly common occurrence for conservative bloggers using Google's Blogspot lately. Coincidence? Maybe. We report, you decide...

Rowan said...

Tell me Captain, what do you think of bitcoins?

ElectricAngel said...

OK, you need to understand economics a LEEETLE better when it comes to tuition. That rise in tuition costs? Yes, it's nominally that high, but there's something more insidious going on.

Consider perfect price discrimination, something the airlines have tried to do for years ("yield maximization.") Extract the maximum amount of revenue per seat: the businessman flying over three days pays more than the weekend, price-sensitive traveler, because he's not really paying the full cost, and because his time has more value to him. Also, he might not be able to plan ahead.

Colleges do the same with tuition. Assess some ridiculous tuition that really only 1 in 10 students' families can afford to pay. Great! Now, by discounting based on financial aid, you can extract the maximal amount of dollars without driving away your customers.

You might do better to compare student loan debt, or some other real figure. Tuition, like any other price, is just a starting point for negotiations.

Ecclesiastes said...

What is the P/Rents for a worthwhile degree, like Accounting?

Anonymous said...

I dont think there is any safe degree anymore.When I lived in vancouver I knew engineers bagging groceries at save on foods. I have family friends that know accounting MBA's with 30 years experience, IT development skills the whole bit and working as ushers for theatres. I know Lawyers driving Limos and selling magazines for a living

The Phantom said...

I know a physical therapist who's a house painter. Me. :)

Painting pays better and it is less annoying..

The Phantom said...

I know a physical therapist who's a house painter. Me. :)

Painting pays better due to lower overhead costs, insurance and taxes. Oh, and regulations, exams, CME credits, and quasi-governmental apparatchiks come and inspect your premesis, your person, your paperwork, your employees and etc.

Plus, as a painter you can tell fat ugly customers with bad attitudes to go pound salt if you want, nothing bad will happen. This is not true of physical therapy. It should be, but its not.

Luckily I had my rather expensive education paid for before I quit and went back to house painting.

Jose said...

Not to defend higher education pricing and customer acquisition (oh the stories I could tell from interacting with admissions people), but:

1. No one is forced to go to college; social pressure, job requirements, are inputs to a personal decision. If people want to eat expensive twinkies, they shouldn't complain they get fat and broke. Especially why the reason they're eating twinkies is that when anyone tries to offer them better food, they complain and demand twinkies.

2. ROI analysis of degrees needs much finer disaggregation (not your job, obviously, and kudos for the data-compiling): not just by degree but by school (EECS from Caltech ≠ EECS from Partyschool State) and by position in graduating class. I'm willing to bet that getting a MBA from Halberd is probably a good investment.

3. I suspect there's a long-term dynamic in the value of colleges, one that might have a discontinuity soon: either because people _get_ that they're paying Kobe steak prices for ground chuck, because of technological changes, or because of a macro-shift in US culture.

Got your book (duh, $0.99), will probably blog some booknotes about it.


Self-exiled spaniard said...

Having travelled and worked in europe, canada and asia, what scares the crap out of me is this:

Most western students: study social studies or arts, spend life at uni getting bladdered and shagging, occassionally stumbling upon a lecture, when they are not too stoned; throw in that they vote for the NDP or whatever socialist party is available

Most asian students: go for the sciences and engineering, avoid drinking in excess (most can't handle it anyways), show up to class and get first class degrees; i find their communication skills suck, but they can be taught at work.

Bottom line is, the children of the present lost generation of westerners will be making sneakers at sweatshops in Pittsburgh, LA and Toronto for Beinjingers such as Qin Long, Hu Wei, etc... All because we (westerners) became lazy.

But, not all Westerners are lazy stoners, do bar that in mind; some places will not decay, it's a shame that most will.

Anonymous said...

@Self-exiled spaniard
It was claimed (somewhere) that about 17% percent of Europeans and Americans (want to) go to technical highschool or university contrary to 56% of Asians.
Add to this that western women hate nerds and have very few kids in general (except lower classes). Try to imagine the future ... yes it looks like a third world country

Anonymous said...

Second-tier effect: jobs that never required a degree now do in response to more degree holders looking for work. Those without degrees can't get the jobs they used to.

On average, Americans have N-dollars in wages. In real life, not getting the job means N=nothing while the other guy gets something.

Rent Toronto said...

Now a days degree has just been for a name only, as a person having knowledge may not have a degree and a person with degree may not have knowledge.

Anonymous said...

I will leave my two cents, for what it's worth. I believe our deficit to China is, atleast in part, due to the fact that America has gone from a country who once built/created things, to a country who would rather not be bothered with manufacturing and let someone else do it. I have a saying, "Americans have invented 99% of everything, if you want to make it better then send it to Japan, if you want to make it cheaper then send it to China." If we want to creat jobs, STOP OUTSOURCING EVERYTHING!!!! For education sakes, I have a family member who has a bachelors degree from the Kelly School of Business at Perdu University, in supply chain management. She graduated, got a great job, then 6 months later lost it due to, what else, outsourcing. People need to quit going to college to get jobs, instead become business owners. Did you know that for the first time in this country there is more student loan debt than consumer credit debt? As of October 2011, the student loan debt in this county has exceeded $1 Trillion, yes, Trillion with a T. Put down the shovel people, let's start filling in the hole we have dug.