Tuesday, July 22, 2014
The Declining Returns to College Education
A good financial return for a college education should not be assumed as it once was. Chances remain high that college will pay, but changes in tuition and labor markets are lowering the return and raising the risk it might not pay for all graduates. Higher and higher tuition, delays finding jobs and the course of study head a list of trouble spots to consider when making a college investment.
Tuition
All the states have one and usually two public universities that offer the best opportunity to measure tuition inflation. Private colleges tend to have higher tuition than public colleges, but they are more likely to offer discounts to attract good students away from the less expensive public colleges. Competition for good students means the posted tuition at private colleges may not be a good measure of actual tuition paid, or its rate of increase. Public colleges are less likely to discount tuition than private colleges, which makes them a better measure of tuition increases.
Compare the 2002 tuition for the two largest state universities in each of the fifty states with the tuition of 2013. Some like the University of Arizona have tuition increases at rates that range up to five times the rate of inflation. For example, if the 2002 tuition of $2,490 at the University of Arizona increased by the rate of inflation until 2013, it would be $3,224.80. Instead it is $10,391, an increase of 317.31 percent, which is an annual compounded increase of 13.87 percent when the general inflation rate was 2.38 percent in the same years. (1)
The high percentage increase at the University of Arizona results partly from its relatively low 2002 tuition. The lower 2002 tuition exaggerates the percentage increase over the period but I can find 31 state colleges out of the hundred that have higher tuition than the University of Arizona. Take the University of Vermont. If its 2002 tuition of $8,994 increased by the rate of inflation until 2013, it would be $11,648.13. Instead it is $15,718, an increase of 74.76 percent, which is a annual compounded percent increase of 5.21 percent, one of the lower rates of increase of tuition for the 100 colleges reviewed.
All of the hundred colleges mentioned above had tuition increases higher than the 2.38 percent increase in the Consumer Price Index. All but seven had increases at least twice the rate of inflation; forty-nine had tuition increases at least three times the rate of inflation.
Wages
Wage for jobs that need BA degree skills need to go up as fast as tuition to avoid lowering the rate of return on a college education. The Bureau of Labor Statistics (BLS) identifies occupations and careers that need BA degree skills. (2)
In 2013, the Bureau of Labor Statistics reported 169 occupations that require BA degree skills with a combined 20.5 million jobs. The total includes 93 occupations with 10 million jobs that had a median wage increase above the inflation rate of 2.38 percent from 2002 to 2013. The median increase of the median wage for the 93 occupations was 2.9 percent. There were 32 occupations with 6.8 million jobs that had a median wage increase less than the inflation rate. The median increase of the median wage for the 32 occupations was 2.0 percent.
The remaining 44 occupations of the 169 do not have corresponding median wage data for 2013 because some occupations were defined in broader categories in 2002. For example, a nurse in 2002 was broken into four occupations in 2013: Registered Nurse, Nurse Anesthetists, Nurse Midwives, and Nurse Practitioners. Hence wage data is not reported for both years for 44 occupations that have 3.7 million jobs.
In sum, only three of the hundred colleges reviewed had tuition increases less than 4 percent a year, while only seven occupations of the 125 with data had median wage increases as high as four percent, and four of the seven were management occupations. The combination of tuition and wage changes over time assures a general decline in the rate of return on a BA degree.
Measuring the Decline
A few calculations help measure the decline. Someone entering the University of Arizona in 2002 had to pay $2,490 for a year’s tuition. At the time student loan interest was set at 4.06 percent. Using the 4.06 interest rate the total four-year investment would be $11,012.82 assuming tuition is paid in the fall and compounded once a year. [Computations are courtesy of the Excel FV spreadsheet function. Entries for the $11,012.82 are FV(.0406/1, 4, -$2,409, 0 ,1). ]
Someone graduating at age 22 in 2006 has 44 years to work and earn a return on the investment. If the $11,012.82 was invested in stocks and bonds and earned a 4.06 percent return over the 44 years it would be $65,525.86. To have the equivalent $65,525.86 because of a better job requiring college degree skills, it will be necessary to earn an extra $44.64 a month for the same 44 years. [Excel entries for the $65,525.86 are FV(.0406/12, 528, 0, -$11,012.82 ,1) and so on.]
Any amount above $44.64 and the return is above 4.06 percent. If the amount was $100 a month for 44 years the return would be 10.9 percent, a return higher than most long term stock returns or student loans.
However, compare that to what happens to someone entering the University of Arizona in 2013 when a year’s tuition jumped to $10,391. In the time between 2002 and 2013 the interest on college student loans has gyrated from a low of 3.4 to a high of 6.8 percent, but it was set at 3.86 percent for the 2013-2014 academic year. Using a 3.86 interest rate the total four-year investment will be $45,732.76, again assuming tuition is paid in the fall and compounded once a year.
If the $45,732.76 was invested in stocks and bonds and earned a 3.86 percent return over 44 years, as above, it would be $249,258.16. To have the equivalent $249,258.16 because of a better job requiring college degree skills, it will be necessary to earn an extra $179.58 a month for 44 years, a little over four times $44.64.
Any amount above $179.58 and the return will be greater than 3.86 percent, but any amount below $179.58 and the return is lower. If the amount was $100 as it was above the return drops to a paltry .67 percent.
Risk
Rapidly rising tuition during a period of stagnant wages has not slowed the tied of graduates. The number of working age adults with BA degrees keeps growing because current graduates are more than double the graduates from the 1970’s who are reaching retirement age. BA degree graduates total 48.7 million from June 1971 until the end of the academic year in 2012. If the two years yet to be reported have at least the same number as 2012, as seems likely, then 52.3 million working age adults have BA degrees. (3)
Some of the 52.3 million with BA degrees went on to get master’s degrees, doctorates and professional degrees. Subtracting the graduate and professional degrees from the total still leaves 28.2 million working age adults with BA degrees to fill the 20.5 million jobs in 2013 that need BA degree skills.
The growing number of people with BA degree skills raises the risk of delay to find higher wage career employment. Compare what happens with 10 years of delay. If the tuition was invested in stocks and bonds and earned 3.86 percent for 10 more years it would grow to $67,235.10. If the $67,235.10 was invested in stocks and bonds and earned a 3.86 percent return over 34 years, it would also be $249,258.16 as above. To have the equivalent $249,258.16 because of a better job for 34 years, it will be necessary to earn an extra $295.21 a month, more than six times the $44.64 from above. An additional $100 a month would be a negative return that would not earn the initial investment.
The chances remain good that college will pay, but individual decisions matter more than ever. I can find 65 occupations in the Occupational Employment Survey requiring no more than high school skills with employment just over 11 million people that have a median wage greater than $50,000. I expect some of the people in those jobs have college degrees, but it is likely their tuition money would be earning a higher return in the stock market. Allow me to repeat, a good financial return for a college education should not be assumed.
Notes
1) Tuition data is from the College Board
2) Occupational Employment Survey, BLS
3) Degree data from the Center for Education Statistics, US Department of Education
Monday, July 7, 2014
From the Jaws of Victory
Matt Garcia, From the Jaws of Victory: the Triumph and Tragedy of Cesar Chavez and the Farm Worker Movement, (Berkeley, CA: University of California Press, 2012), 298 pages
From the Jaws of Victory narrates the rise and fall of the United Farm Workers (UFW) union. An introductory chapter gives a brief roadmap of the book and a warning: the book includes the failures and shortcomings of UFW founder, Cesar Chavez, not just his success.
The first three chapters chronicle the slow but successful efforts to organize farm workers and improve wages and working conditions. After a brief discussion of historical material and the former Bracero Program, the narrative turns to Cesar Chavez and his decision to leave community organizing to organize farm workers. That was April 12, 1962.
Chavez built a devoted following to his United Farm Workers Association (UFWA) by knocking on doors and recruiting members one by one. He used marches, rallies and fasts to attract public attention in what turned into a crusade. His UFWA lacked the funds to support a strike when Larry Itliong of the Agriculture Workers Organizing Committee (AWOC) called his mostly Filipino members out of the Delano vineyards September 8, 1965. UFW joined the strike and the two unions combined their efforts to attract public support and put economic pressure on the growers.
Garcia develops the strike and its unfolding strategies over the next 70 pages. The two unions eventually merged to become the UFW with Chavez as president. His leadership in the Delano grape strike put the UFW on the path of success. The coincidence of the farm worker movement with civil rights helped bring in hundreds of volunteers and make the strike a cause for social justice. The early presence of UAW president Walter Reuther brought additional publicity.
The narrative follows the path of decisions that evolved into a successful consumer boycott. The union set up boycott houses in big grape consuming cities and volunteers settled in to devise strategies to reduce grape sales and sales of branded products made from grapes, like wine. Some grocery store chains agreed not to shelve grapes; pickets confronted shoppers at stores that would not go along. In Toronto, young Harvard dropout Marshall Ganz let balloons lettered with “Don’t buy Grapes” float to the ceiling of grocery stores, much to the anger of store managers.
Gradually the boycott succeeded. Prices dropped and then sales. Total shipments were off 9.2 percent by 1969. The bigger producers settled and others followed. Growers in the Coachella valley agreed first, then 26 growers in the San Joaquin Valley signed a labor union contract July 29, 1970.
By August 1970 UFW had 12,000 members, but external and internal problems brought celebrating to an abrupt halt. Chapter four narrates the division and conflict with the Teamsters union after they reneged on their promise not to organize farm workers. The Teamsters organized Salinas’ lettuce growers in August 1970 without a vote of farm workers and in competition with the United Farm Workers. Garcia takes readers through the gritty details of their conflict: picketing, fights, beatings, a court injunction and twenty days in jail for Cesar Chavez who defied the court.
The competition between the UFW and the Teamsters generated questions about labor law. Farm workers are excluded from the National Labor Relations Act that established voting procedures for union representation, but the law also makes boycotts an unfair labor practice subject to immediate court injunction. Chapter five describes the pros and cons of passing a California Agricultural Labor Relations Act, the administration of the law after it passed in May 1975, and the decision to propose changes in the law through a statewide initiative, proposition 14.
UFW won a majority of its representation elections, but the law in practice generated many disputes and unfair labor practice charges, often because the growers did not want the UFW organizing on their property. After a short period of operation both the growers and the unions wanted to amend the law, but the UFW made the aggressive and risky decision to propose a statewide referendum. Proposition 14, among other things, proposed to give union organizers access to workers on California farms during elections and required farm owners to allow organizers on their farms an hour before work, an hour after work, and at lunch time.
Garcia takes readers through the UFW campaign to pass proposition 14. Chavez diverted significant money and personnel to the campaign and over ruled internal opposition, but there was organized opposition from the growers who found a Japanese-American internment camp victim who characterized the access issue as stealing property rights.
Proposition 14 lost badly in the November 1976 election. Garcia interviewed union personnel who described Chavez as badly shaken up by the defeat and they give November 1976 as the date he changed.
There were ominous signs of trouble before the proposition 14 election loss. Chavez previously moved his headquarters to a remote place he called La Paz near Keene, California, which took him away from the activities of the union and the farm workers he needed to influence. He had trouble accepting that the labor contracts he signed needed administration. He did not appreciate the need to switch from volunteers to paid professional staff and continued to prefer organizing to the day to day work of a union, but these were miner compared to the trouble after the election loss.
The last three chapters - six, seven and eight - narrate the union’s post election decline and Chavez role in the union’s ruin. It is a story of the obsession Chavez developed to force union volunteers and staff to travel to La Paz to play a “Game” developed by his friend Charles Dederich as part of a drug rehabilitation program. The Game called for a moderator to attack and ridicule a target and then have a dozen others join in as part of “therapy” for self-examination. Only Chavez and few sycophants could see any connection to the needs of a union.
It is also a story of Executive Board meetings filled with personal attacks and purges of people Chavez falsely accused of plotting against him and the union. The people Garcia interviewed remember specific episodes like the “Monday Night Massacre” where the vegetarians at La Paz were attacked with accusations of plotting against the union and expelled without a chance to reply. Later the entire legal staff was summarily fired; 17 attorneys and dozens of support staff. Chavez arbitrarily called off the boycott and then badly offended Filipino farm workers when he insisted on a visit to Philippine dictator Ferdinand Marcos.
Many volunteers and staff protested through this period and tried to continue with the business of the union, but to no avail. Over the course of four years firings and resignations decimated the union which ceased doing what unions do by the early 1980’s. The book stops at this point followed by a brief epilogue.
The book covers the rise and fall of Cesar Chavez and the UFW thoroughly and clearly as it sets out to do, but not more. The book is not a history of farm workers or farm worker unions. Other unions and union organizing are mentioned only as necessary for the UFW story.
Given the tight focus of the book it has many details. Garcia had access to tape recordings of meetings and especially Executive Board meetings that allow a line by line recounting of who said what that fills the last three chapters of the book. Readers are introduced to many names in the narrative; some disappear, some reappear many times. Readers get to know a few key figures like Marshall Ganz and chief counsel Jerry Cohen, but special effort is required to keep track of all the people and their role in the story. Sometimes discussion reads like an organizer’s convention.
As I finished the book I weighed the positives and negatives in the work of Cesar Chavez and the legacy he leaves to organized labor, but one thing caught my eye in the epilogue: not one person picking grapes in California in 2012 was a member of a union.
From the Jaws of Victory narrates the rise and fall of the United Farm Workers (UFW) union. An introductory chapter gives a brief roadmap of the book and a warning: the book includes the failures and shortcomings of UFW founder, Cesar Chavez, not just his success.
The first three chapters chronicle the slow but successful efforts to organize farm workers and improve wages and working conditions. After a brief discussion of historical material and the former Bracero Program, the narrative turns to Cesar Chavez and his decision to leave community organizing to organize farm workers. That was April 12, 1962.
Chavez built a devoted following to his United Farm Workers Association (UFWA) by knocking on doors and recruiting members one by one. He used marches, rallies and fasts to attract public attention in what turned into a crusade. His UFWA lacked the funds to support a strike when Larry Itliong of the Agriculture Workers Organizing Committee (AWOC) called his mostly Filipino members out of the Delano vineyards September 8, 1965. UFW joined the strike and the two unions combined their efforts to attract public support and put economic pressure on the growers.
Garcia develops the strike and its unfolding strategies over the next 70 pages. The two unions eventually merged to become the UFW with Chavez as president. His leadership in the Delano grape strike put the UFW on the path of success. The coincidence of the farm worker movement with civil rights helped bring in hundreds of volunteers and make the strike a cause for social justice. The early presence of UAW president Walter Reuther brought additional publicity.
The narrative follows the path of decisions that evolved into a successful consumer boycott. The union set up boycott houses in big grape consuming cities and volunteers settled in to devise strategies to reduce grape sales and sales of branded products made from grapes, like wine. Some grocery store chains agreed not to shelve grapes; pickets confronted shoppers at stores that would not go along. In Toronto, young Harvard dropout Marshall Ganz let balloons lettered with “Don’t buy Grapes” float to the ceiling of grocery stores, much to the anger of store managers.
Gradually the boycott succeeded. Prices dropped and then sales. Total shipments were off 9.2 percent by 1969. The bigger producers settled and others followed. Growers in the Coachella valley agreed first, then 26 growers in the San Joaquin Valley signed a labor union contract July 29, 1970.
By August 1970 UFW had 12,000 members, but external and internal problems brought celebrating to an abrupt halt. Chapter four narrates the division and conflict with the Teamsters union after they reneged on their promise not to organize farm workers. The Teamsters organized Salinas’ lettuce growers in August 1970 without a vote of farm workers and in competition with the United Farm Workers. Garcia takes readers through the gritty details of their conflict: picketing, fights, beatings, a court injunction and twenty days in jail for Cesar Chavez who defied the court.
The competition between the UFW and the Teamsters generated questions about labor law. Farm workers are excluded from the National Labor Relations Act that established voting procedures for union representation, but the law also makes boycotts an unfair labor practice subject to immediate court injunction. Chapter five describes the pros and cons of passing a California Agricultural Labor Relations Act, the administration of the law after it passed in May 1975, and the decision to propose changes in the law through a statewide initiative, proposition 14.
UFW won a majority of its representation elections, but the law in practice generated many disputes and unfair labor practice charges, often because the growers did not want the UFW organizing on their property. After a short period of operation both the growers and the unions wanted to amend the law, but the UFW made the aggressive and risky decision to propose a statewide referendum. Proposition 14, among other things, proposed to give union organizers access to workers on California farms during elections and required farm owners to allow organizers on their farms an hour before work, an hour after work, and at lunch time.
Garcia takes readers through the UFW campaign to pass proposition 14. Chavez diverted significant money and personnel to the campaign and over ruled internal opposition, but there was organized opposition from the growers who found a Japanese-American internment camp victim who characterized the access issue as stealing property rights.
Proposition 14 lost badly in the November 1976 election. Garcia interviewed union personnel who described Chavez as badly shaken up by the defeat and they give November 1976 as the date he changed.
There were ominous signs of trouble before the proposition 14 election loss. Chavez previously moved his headquarters to a remote place he called La Paz near Keene, California, which took him away from the activities of the union and the farm workers he needed to influence. He had trouble accepting that the labor contracts he signed needed administration. He did not appreciate the need to switch from volunteers to paid professional staff and continued to prefer organizing to the day to day work of a union, but these were miner compared to the trouble after the election loss.
The last three chapters - six, seven and eight - narrate the union’s post election decline and Chavez role in the union’s ruin. It is a story of the obsession Chavez developed to force union volunteers and staff to travel to La Paz to play a “Game” developed by his friend Charles Dederich as part of a drug rehabilitation program. The Game called for a moderator to attack and ridicule a target and then have a dozen others join in as part of “therapy” for self-examination. Only Chavez and few sycophants could see any connection to the needs of a union.
It is also a story of Executive Board meetings filled with personal attacks and purges of people Chavez falsely accused of plotting against him and the union. The people Garcia interviewed remember specific episodes like the “Monday Night Massacre” where the vegetarians at La Paz were attacked with accusations of plotting against the union and expelled without a chance to reply. Later the entire legal staff was summarily fired; 17 attorneys and dozens of support staff. Chavez arbitrarily called off the boycott and then badly offended Filipino farm workers when he insisted on a visit to Philippine dictator Ferdinand Marcos.
Many volunteers and staff protested through this period and tried to continue with the business of the union, but to no avail. Over the course of four years firings and resignations decimated the union which ceased doing what unions do by the early 1980’s. The book stops at this point followed by a brief epilogue.
The book covers the rise and fall of Cesar Chavez and the UFW thoroughly and clearly as it sets out to do, but not more. The book is not a history of farm workers or farm worker unions. Other unions and union organizing are mentioned only as necessary for the UFW story.
Given the tight focus of the book it has many details. Garcia had access to tape recordings of meetings and especially Executive Board meetings that allow a line by line recounting of who said what that fills the last three chapters of the book. Readers are introduced to many names in the narrative; some disappear, some reappear many times. Readers get to know a few key figures like Marshall Ganz and chief counsel Jerry Cohen, but special effort is required to keep track of all the people and their role in the story. Sometimes discussion reads like an organizer’s convention.
As I finished the book I weighed the positives and negatives in the work of Cesar Chavez and the legacy he leaves to organized labor, but one thing caught my eye in the epilogue: not one person picking grapes in California in 2012 was a member of a union.
Tuesday, July 1, 2014
The Gamblers Dilemma
When I speak of gamblers I am not talking about a bet on your favorite football pool at the office or a game of cards with friends on Saturday night; that you can call entertainment and fun. What I am talking about is repeated bets in commercial casinos or state lotteries. Gamblers who gamble day after day or month after month will earn nothing at best.
Suppose you bet a dollar on the flip of a coin. For a head you win a dollar, for a tail you lose your dollar. Probably you recognize that bet as a fair bet; your chance of winning a dollar just equals your chance of losing a dollar. But suppose you play the game day after day after day. Each day your chance is the same, but after 100 days you might win 56 out of a 100 to be $6.00’s up. After another 100 days you might win 47 and be up only $3.00.
Keep playing and the laws of large numbers take over. Play the game 10 thousand times and you can only expect to win $5,000 and lose $5,000. Play the game long enough and in the parlance of chance, your expected return will be zero: nothing. Most investors will not be happy earning nothing.
What is true for a private game of coin flipping is also true for all fair bets. Parties to a fair bet will earn nothing unless one of them stops soon after they have a stretch of good luck. Now we all know the state lotteries and commercial gambling casinos are earning money. State lotteries and casinos earn money because they are allowed to tilt the odds in their favor and the laws of large numbers take over to earn them a return.
For decades gambling was discouraged or illegal and even by the late 1980’s gambling was limited to two travel locations where table gambling prevailed as the dominate wager. After twenty-five years of expansion gambling may already be available at a shopping mall near you, and it will likely be at slot machines.
A modern slot machine is a computer programmed to lure players into repeated betting, but it is not a fair bet. State gambling commissions allow them tilt the odds in favor of the house. Keep gambling and no matter how many jackpots you win and you will end with nothing.
“Real investors do not play at casinos.”
Suppose you bet a dollar on the flip of a coin. For a head you win a dollar, for a tail you lose your dollar. Probably you recognize that bet as a fair bet; your chance of winning a dollar just equals your chance of losing a dollar. But suppose you play the game day after day after day. Each day your chance is the same, but after 100 days you might win 56 out of a 100 to be $6.00’s up. After another 100 days you might win 47 and be up only $3.00.
Keep playing and the laws of large numbers take over. Play the game 10 thousand times and you can only expect to win $5,000 and lose $5,000. Play the game long enough and in the parlance of chance, your expected return will be zero: nothing. Most investors will not be happy earning nothing.
What is true for a private game of coin flipping is also true for all fair bets. Parties to a fair bet will earn nothing unless one of them stops soon after they have a stretch of good luck. Now we all know the state lotteries and commercial gambling casinos are earning money. State lotteries and casinos earn money because they are allowed to tilt the odds in their favor and the laws of large numbers take over to earn them a return.
For decades gambling was discouraged or illegal and even by the late 1980’s gambling was limited to two travel locations where table gambling prevailed as the dominate wager. After twenty-five years of expansion gambling may already be available at a shopping mall near you, and it will likely be at slot machines.
A modern slot machine is a computer programmed to lure players into repeated betting, but it is not a fair bet. State gambling commissions allow them tilt the odds in favor of the house. Keep gambling and no matter how many jackpots you win and you will end with nothing.
“Real investors do not play at casinos.”
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