Editor's Note: William H. Gross is the Managing Director of PIMCO. This is a republishing of his Investment Outlook.
By William H. Gross
A mind is a precious thing to waste, so why are millions of America’s students wasting theirs by going to college?
All of us who have been there know an undergraduate education is primarily a four year vacation interrupted by periodic bouts of cramming or Google plagiarizing, but at least it used to serve a purpose. It weeded out underachievers and proved at a minimum that you could pass an SAT test. For those who made it to the good schools, it proved that your parents had enough money to either bribe administrators or hire SAT tutors to increase your score by 500 points. And a degree represented that the graduate could “party hearty” for long stretches of time and establish social networking skills that would prove invaluable later on at office cocktail parties or interactively via Facebook.
College was great as long as the jobs were there.
Now, however, a growing number of skeptics wonder whether it’s worth the time or the cost.
Peter Thiel, an early investor in Facebook and head of Clarium Capital, a long-standing hedge fund, has actually established a foundation to give 20 $100,000 grants to teenagers who would drop out of school and become not just tech entrepreneurs but world-changing visionaries.
College, in his and the minds of many others, is stultifying and outdated – overpriced and mismanaged – with very little value created despite the bump in earnings power that universities use as their raison d’être in our modern world of money.
Fact: College tuition has increased at a rate 6% higher than the general rate of inflation for the past 25 years, making it four times as expensive relative to other goods and services as it was in 1985.
Subjective explanation: University administrators have a talent for increasing top line revenues via tuition, but lack the spine necessary to upgrade academic productivity. Professorial tenure and outdated curricula focusing on liberal arts instead of a more practical global agenda focusing on math and science are primary culprits.
Fact: The average college graduate now leaves school with $24,000 of debt and total student loans now exceed this nation’s credit card debt at $1.0 trillion and counting (7% of our national debt).
Subjective explanation: Universities are run for the benefit of the adult establishment, both politically and financially, not students. To radically change the system and to question the sanctity of a college education would be to jeopardize trillions of misdirected investment dollars and financial obligations.
Conclusion to ponder: American citizens and its universities have experienced an ivy-laden ivory tower for the past half century. Students, however, can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace.
Fareed Zakaria, as usual, has a well-thought-out solution. “We need,” he writes, “a program as ambitious as the GI Bill,” but one that focuses on retraining existing unemployed workers and redirecting our future students.
Instead of liberal arts, he suggests focusing on technical education, technical institutes and polytechnics as well as apprenticeship programs. Our penchant for focusing on high tech, value-added jobs should be modified and redirected, he claims, to mimic the German path, which allows people with good technical skills but limited college education to earn a decent living.
One thing college does do is to keep 25 million students off the unemployment rolls, much like it did for me when I went on my own four year vacation.
The world was a different oyster in 1966, however, and it behooves America to recognize the reversal and the necessity for significant changes if it is to compete in the global marketplace of the 21st century.
It is becoming obvious that the 2012 election will be fought on a battlefield of job creation.
A 9.1% official unemployment rate, and a number nearly double that when discouraged and part-time workers are included in the rolls, portend an angry and disillusioned electorate, which will include millions of jobless college graduates ill-trained to compete in the global marketplace.
Over the past 10 years under both Democratic and Republican administrations, only 1.8 million jobs have been created while the available labor force has grown by over 15 million.
It is clear, however, that neither party has an awareness of the why or the wherefores of how to put America back to work again. Few economic advisors from either party ever mention structural long-term disconnects in employment – a recognition that cyclical influences will no longer dominate the U.S. labor market.
Manufacturing and goods exports have ceded enormous ground to China and other developing labor markets, as America’s reliance on services and high-tech innovation has exposed gaping holes in an historically successful model.
Almost any industry dominated or significantly connected to finance and financial leverage has hit the canvas and stayed down in the aftermath of Lehman 2008. Housing construction, real estate brokerage, banking and consumer retail employment will likely never come back to levels dominated by our prior decade’s excessive leverage and its abuse leading to overconsumption. Because of that focus, a “shovel-ready,” vigorous manufacturing sector is not there to pick up the slack.
Similarly, the high tech paragons of the 21st century – Apple, Microsoft, Google, Facebook et al. – never were employers of high school or B.A. college graduates in significant numbers.
Production of hardware, to the extent that any was needed, quickly gravitated to foreign ports of call where workers were willing to produce an excellent product for 1/10th of the U.S. wage.
The past several decades have witnessed an erosion of our manufacturing base in exchange for a reliance on wealth creation via financial assets.
Now, as that road approaches a dead-end cul-de-sac via interest rates that can go no lower, we are left untrained, underinvested and overindebted relative to our global competitors. The precipitating cause of our structural employment break is both internal neglect and external competition. Blame us. Blame them. There’s plenty of blame to go around.
Solutions from policymakers on the right or left, however, seem focused almost exclusively on rectifying or reducing our budget deficit as a panacea.
While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare.
Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years.
President Obama’s long-term budget makes just such a claim and Republican alternatives go many steps further. Former Governor Pawlenty of Minnesota might be the Republicans’ extreme example, but his claim of 5% real growth based on tax cuts and entitlement reductions comes out of left field or perhaps the field of dreams. The United States has not had a sustained period of 5% real growth for nearly 60 years.
Both parties, in fact, are moving to anti-Keynesian policy orientations, which deny additional stimulus and make rather awkward and unsubstantiated claims that if you balance the budget, “they will come.”
It is envisioned that corporations or investors will somehow overnight be attracted to the revived competitiveness of the U.S. labor market: Politicians feel that fiscal conservatism equates to job growth. It’s difficult to believe, however, that an American-based corporation, with profits as its primary focus, can somehow be wooed back to American soil with a feeble and historically unjustified assurance that Social Security will be now secure or that medical care inflation will disinflate.
Admittedly, those are long-term requirements for a stable and healthy economy, but fiscal balance alone will not likely produce 20 million jobs over the next decade. The move towards it, in fact, if implemented too quickly, could stultify economic growth. Fed Chairman Bernanke has said as much, suggesting the urgency of a congressional medium-term plan to reduce the deficit but that immediate cuts are self-defeating if they were to undercut the still-fragile economy.
Academics also point to a theory known as Ricardian equivalence, a notion named after David Ricardo from the early 19th century. His ivory tower theorem was that consumers would become more and more confident of their financial future if in fact they believed that their own government’s exuberance would be held in check.
Balance the U.S. or any government budget, he prophesized, and the private sector would extend and lever theirs.
Well, commonsensically and anecdotally, I know of no family who, after watching the Republican candidates’ debate in New Hampshire, went out the next day and bought themselves a flat screen under the assumption that their Medicare entitlements would be cut in future years and the U.S. budget balanced.
Ricardo and his “equivalence” belong in the trash bin of theses and research aimed more towards academics than a practical remedy to America’s job crisis.
What then, shall we do?
My preferred solution has long-term elements, which includes the opening language in this Investment Outlook, concerning the value of a college education as currently structured. Peter Thiel may be on to something, but all of our kids just can’t up and quit college à la Bill Gates. Still, if we are to compete globally while maintaining a higher wage base, we must train for “middle” in addition to “high” tech. Philosophy, sociology and liberal arts agendas will no longer suffice. Skill-based education is a must, as is science and math.
Additionally and immediately, however, government must take a leading role in job creation. Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.
The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper. That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities. Our labor force is too expensive and poorly educated for today’s marketplace.
In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is. Government must step up to the plate, as it should have in early 2009.
An infrastructure bank to fund badly needed reconstruction projects is a commonly accepted idea, despite the limitations of the original “shovel-ready” stimulus program in 2009. Disparate experts such as GE’s Jeff Immelt, Fareed Zakaria, Jeffrey Sachs and Paul Krugman believe an infrastructure bank to be an excellent use of deficit funds: a true investment in our future.
While the current administration admits that the $25 billion in Recovery Act spending on infrastructure only created 150,000 jobs, it also stabilized and improved this nation’s productivity for years to come.
Clean/green energy investments also come to mind, most of which require government funding and a government thrust in order to create millions of jobs.
China knows this and is off and running. The U.S. needs to learn from their state-oriented model. In times of extremis, pushing on the private sector string is ineffective, especially within the context of a global marketplace that offers alternative investment locations. Government must temporarily assume a bigger, not a smaller, role in this economy, if only because other countries are dominating job creation with kick-start policies that eventually dominate global markets.
And how about at least an intelligent discussion on “trade policy” which incorporates more than just a symbolic bashing of Chinese currency relative to the dollar. Who, from either side of the aisle is willing to discuss the use of trade measures in order to help balance our $500 billion trade deficit?
This is delicate territory, reawakening fears of Smoot-Hawley in the 1930s, but we are in delicate territory regarding our unemployment rate as well. Warren Buffett in 2003 advocated an idea he called “Import Credits” which he claimed would increase exports in the hundreds of billions and jobs in the hundreds of thousands. Republicans? Democrats? Discussion please.
In the end, I hearken back to revered economist Hyman Minsky – a modern-day economic godfather who predicted the subprime crisis. “Big Government,” he wrote, should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation. FDR had a program for it – the CCC, Civilian Conservation Corps, and Barack Obama can do the same.
Economist David Rosenberg of Gluskin Sheff sums up my feelings rather well. “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.” Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem.
Those who advocate that job creation rests on corporate tax reform (lower taxes) or a return to deregulation of the private economy always fail to address dominant structural headwinds which cannot be dismissed: 1) Labor is much more attractively priced over there than here, and 2) U.S. employment based on asset price appreciation/finance as opposed to manufacturing can no longer be sustained.
The “golden” days are over, and it’s time our school and jobs “daze” comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall as opposed to Main Street.
The views expressed in this article are solely those of William H. Gross.
This article contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Pacific Investment Management Company LLC. ©2011, PIMCO.
Pres Clinton said as leaving office he said that the surplus will not forever. We can not cut taxes now. Then cut taxes, most revenue lost was from the rich. The economy was going to hell during Bush and the first bailouts. I think the economist saw no choice, except stimulas. Now the environment is doing suggesting cuts on education, infrastructure, medicare, social security, I guess the VA will come soon. What is wrong with this picture when other countries are graduating millions? No more investments in our people? What will happen in the long term for us?
Poor people the get to work, have about 7% withheld. There Employer must match that. Yet the wealthy can stop paying if they make alot of money. The rich continues ro get the tax breaks, even though they escape the 14% that everybody else has to pay, even if you're getting your first job. Remember the rich are entitled to receive ss n medi for the amount they contributed before their income raised. Don't forget that as employment goes down, there is moe n more people that must go "under the table" including illegal imm.
Our politicians are somewhat disconnected from the people, poor, n x middleclass. The idea that the rich will stop trying to make money because they have to pay fair taxes is ridiculous! If there is a demand for services they will invest! The successful rich oeople and businesses I am proud of. They should be happy to do their share for America.
As I wrote last month, each student and family should carefully consider the costs of education and the benefits (not always financial) of advanced education.
I very much agree with Bill Gross that " Universities are run for the benefit of the adult establishment, both politically and financially, not students." A troubling trend indeed.
I think it is interesting that we use to think everyone should own a house, a car and get a college education. Is the paradigm shift being forced by a new reality or is it the other way around? We have also asked older people to stop working this month (to make room for newer workers) and debate whether we need to take care of our aging population. When you step outside the discussion and look in, everything is changing 180 degrees here.
I agree that america must focus more of its education on the hard sciences and mathematics. But, I completely disagree that liberal arts education should completely discounted. The liberal arts teach critical thinking and creativity. To put it in popular parlance they teach to think "out of the box". A large part of our financial crisis stems from over consumerism and a lack of critical thinking. Colleges were not originally vocational schools. They were meant to give a student a classical education. while the hard sciences have straight line application to certain occupations, that education must be balanced by liberal arts. Instead of abandoning liberal arts we must reiterate it even more in conjunctioin with math and science so we have a well rounded society and diversity of skillsets.
As a former high school principal of a high-poverty school, I am appalled and rather frightened by all the noise about college education being unnecessary and too expensive. We worked very hard to prepare students for college and to expose them to it. Few of our parents were college-educated. I for one do believe that college (whether liberal arts, pre-professional or technical) is for everyone. We were proud to increase our college going graduates from 50% to 85% in two years of very hard work (and to maintain at that level). Most attended community colleges. Somehow the privileged folks who write about college debt assume Princeton and Yale are the only choices. Stop telling our kids to forget college. It is their way out of poverty and the only way out.
As for the liberal arts, Robert Hutchins required a core liberal arts education of undergraduates at the University of Chicago. Check the accomplishments of his students. They were among the most influential and productive members of our society. If you're going to trash liberal arts education, be sure you're not also among those who lament the inanity of our politics, the gullibility of our populace, the demise of investigative journalism and a lack of volunteerism.
My take: http://nogginstrain.blogspot.com/2011/01/theyre-all-going-to-college.html
First off great article and I agree with what is written. Starting with the educational system I think we need to raise the standards of what a high school education is. When I graduated from high school in 2001 my last year wasn't necessary to meet the required courses standards of a diploma. My senior year was spent taking electives and on the job training. We need to make it so a high school education is the equivalent of a college associates degree. This could be done by streamlining the courses to fit in 11 years of schooling and adding an extra year for a total of 13.
Your right about the trade deficit. As I've been doing research over the past month of the economic current conditions and what lead to them one thing is clear our trade deficit is the largest piece of the puzzle. Between NAFTA and china our deficit is bleeding not only large amounts money but also jobs form the US.
And I agree that the government needs to step in and create jobs in green technology. Think of the millions of government vehicles most are gas guzzling V8. Why haven't they made large multibillion dollar contracts with car company's to replace them with hybrids or electric cars and set high requirements of efficiency for the cars being bought. And if companies can buy 100% green energy why can't the government build their own wind and solar farms on property it owns that would pay for its self.
Oil was the trigger and the second largest piece of the economic problems. 2nd and 3rd world countries are using oil at faster and faster rates. Over the past 8 years oil use in these countries has went up from nothing to double the combined use of 1st world countries. We can't drill out of this.
While there is much to discuss regarding the article by William Gross, I am going to limit myself to one small issue. Gross states that "Professorial tenure and outdated curricula focusing on liberal arts instead of a more practical global agenda focusing on math and science are primary culprits." Math and science ARE liberal arts. It seems common to confuse the humanities with the liberal arts, but a classical liberal arts education includes both the humanities and math and science. It would certainly include "algebra, physics, and geometry." Perhaps the problem is that some supposed liberal arts programs have become so "flexible" that they no longer deserve the name?
As a distant observer, it has occurred to me that the deliberate and catastrophic mispricing of risks in mortgage backed securities sold by Wall St. throughout the world, is one of the most egregious, crafty, successfully fraudulent acts ever perpetrated to investors in the history of finance..!
As incompetent U.S. politicians (i.e., Levin, Shelby, Dodd, Bernake, Geithner, Clinton, Ruben, Greenspan) did absolutely nothing to prevent it, their Wall St. cronies and high heeled lobbyists laughed their way to the bank by betting against the same structured products in which they sold throughout the world...!
At the time of this writing, not a single person from U.S rating agencies or Wall St. has gone to jail for this fraud while tax payers picked up the bill...!
Wow, isn't capitalism great in the U.S.?
As a recent Chinese economist stated, where ever there is wealth in the world (i.e., real estate, stocks, 401k), Wall St. will find a way to steal it while politicians do nothing to prevent it...!
The stench of the financial crisis created by Wall St. and allowed by U.S. politicians permeates from Shangai to Dubai...!
Starting this year your child (or children) cannot be denied coverage simply because they have a pre-existing health condition. If you don't have insurance for you and your children search "Penny Health" online they are the best.
"That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities. Our labor force is too expensive and poorly educated for today’s marketplace".
These companies should work together with the government to improve the skills and abilities of the domestic labour, which is an investment in human resources. The public sector can't carry this burden alone. The U.S. should find out what lures American companies to manufacture abroad besides cheap labour and market presence.
I feel like my degree was a complete waste of money. I had no idea what I wanted to study when I started school and ended up with an "unskilled" degree in social work just so I could graduate and get out of there. For the amount of debt my schooling costs, I should have just taken the money and traveled the world a bit.
Looking back now,I am angry that no one ever guided me to a career that could actually be employable, but colleges aren't there to serve students, they are there to sell a product- degrees. They don't really care what happens afterwards. I wish I had known that when I started school. I excelled in math and science in high school but wasn't really interested in it so didn't pursue it in college. If someone had told me that I wouldn't get a job without a math or science/computer degree, I may have made different choices. But everyone always says "study what you love, find something you're passionate about!" we need to stop lying to our kids and tell them to study science and technology if they ever want a job.
We need to enourage kids to pick technological colleges and trade schools, which are cheaper and much more employable than liberal arts colleges.
A fine, straight-thinking-talking article, Mr. Grossman. Re studies outside math & science, two points:
1. As the educational system stands now, the trick should be to let the learners know at the beginning and throughout why* they're required to take those required courses, what* they will get out of them, and how* that will "enrich" and more pointedly "be of use" in their futures.
2. I predict online learning WILL be the future of learning. But teachers, or better, creators of widely accessible courses, will have to be the best of the best builders of step-by-step relevant, fascinating content, very well paid and whose courses will be sought because they just plain ol' work for little kids on up. T
hey will bestow on the humble learner a coherent, useful world of knowledge to improve and sustain their lives through better job preparedness. (Do I hear the name Khan, here?) They will be very-well paid by government, int'l institutions or consortiums of private enterprise investors who see that Universal Learning is like water and air. Their quality and availability are essential, repeat essential, for the existence of our nation as we have known it. Universal Learning must be available from the very poor to very rich throughout their lives.
Google above all has realized this, but hasn't yet been able to provide the mind-enabling program mechanism to help content experts create courses for acquiring knowledge as they have SketchUp for architects to "build" structures globally available on the net. But someone will do it. It will come or else we wither as a strong, powerful nation.
I once took a class on speaking to my constituents. Here goes: Doze mfckin dem o crates wunt 2 tak ur gunz n stuf. Day wunt 2 tak relijun out uv ur sckools 2. Day ulso wunt 2 tax ur muny cuz day wunt to tax da rich. an cus u mak 10000 dolars a yeer doze dem o crates wunt 2 tak it fur killin kidz n stuf.
How'd I do?
This was excellent – I can understand every word...
As is typical in the American way of thinking, this article presents the crisis in American universities in "black or white" terms. This is not an either/or proposition. Why must we promote technical training at the expense of liberal arts education? Why is it not possible to do both? I agree that the American university education is in need of change, but it does not need to be torn down completely. I also agree with the previous comment that our current financial crisis is due to a lack of critical thinking. Without liberal arts education, we produce a technically trained citizenry unable to understand or defend their own humanity. There is already a revolution going on in education. Look at the critical literacy movement and the work of Chrisine Leland at Indiana University for an understanding of the future of liberal arts education.
The article and the comments assume that a technically competent American public would be employable. By whom? If you believe that "Our labor force is too expensive and poorly educated for today’s marketplace", then education only addresses one of two critical problems.
I can attest, through the experience of friends and relatives, that competence in computer programming or an engineering degree and experience are no guarantee of a job. The jobs of countless competent techies have been offshored, where similar competence exists at far lower price. Even if the competence is not at complete parity to American workers (and often it is), the jobs will leave our borders because of price.
Assuming that we focus education on the technical, the scientific, the mathematical, and the vocational, we will still have a labor force that prices itself out of the market.
I'm sorry, but what does some bond fund manager know about this anyway. As a country the sooner we stop giving guys iike this a platform the better off we will be.
This is a great tip particularly to those new to the blogosphere.
Short but very precise info… Many thanks for sharing this one.
A must read post!
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