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'You can beat the stock market!' Invest in a college degree

Narayana Kocherlakota
Narayana Kocherlakota

My headline is not a subject line from a junk email.

It’s lifted from the commencement speech of Narayana Kocherlakota, the newly minted president (since last October) of the Federal Reserve Bank in Minneapolis.

Kocherlakota delivered a pep talk and a bit of an investment strategy session in May to graduates of the University of Minnesota’s College of Liberal Arts.

Kocherlakota, a former chairman of the U’s Department of Economics, said the annual rate of return on a college degree is better than the stock market’s.

"What is the expected return on investing in a college education — that is, what will you get back in terms of increased wages per dollar that you invested? Recent studies estimate that finishing college over high school delivers a return of somewhere between 8 percent and 10 percent per year. Is this a big number? Well, historically, the rate of return on the stock market is around 6-7 percent per year. So, by investing in a college education, you can beat the stock market! That’s especially true because the return to a college education is much less risky."

If I had been a parent or grad sitting in that audience, I’d have wondered: If that’s true, why’s it so difficult to find a job after plunking down $40,000 or so in tuition?

Kocherlakota anticipates the reactions from the fresh crop of critical thinkers and their parents.

'Complicating factor'
"Now, there is a complicating factor to this somewhat rosy scenario that’s probably occurred to all of you: We are coming out of one of the worst economic downturns since the Great Depression. Jobs are not in abundance."

Then he recalls the job market upon his graduation in 1983, "when the unemployment rate was actually even higher than it is today."

"Now it is true that when I graduated, the slack job market put downward pressure on all wages, including those of college grads. However, over time, the wages of these June 1983 grads did rise, and the negative effects of the recession were largely lost. Even in a tough job market, my cohort found that college remained a good investment."

If any critical thinkers still feel skeptical, Kocherlakota’s speech is available on the Federal Reserve Bank’s website and it includes a footnote citing the source of his investment information — a National Bureau of Economic Research working paper titled "Earnings functions, rates of return, and treatment effects: The Mincer equation and beyond."

While I was in the cyber-neighborhood, I couldn’t resist checking out the president’s online bio. He was born in Maryland. His degrees came from Princeton and the University of Chicago. He’s the 12th president in the history of the Minneapolis Federal Reserve Bank.

But one of the niftiest features is in a summary on another page — an audio pronunciation of Narayana Kocherlakota.

Trust me. This is exceptionally helpful info for anyone who has to interview Nair-ah-yah-nah Koach-er-lah-ko-tah or introduce him to a crowd.

Please send speeches: I’m collecting college and university commencement speeches in various formats to run throughout the summer. Send speeches, links, etc. to cselix[at]minnpost[dot]com.

Previous commencement speeches in this series
June 1: Kaiser CEO George Halvorson unearths an unusual past in Concordia College commencement speech

May 24: Stephen Lundin to MCAD grads: 'If work isn't satisfying to your human spirit, it's too big a price to pay'

May 14: Poet Elizabeth Alexander's advice for College of St. Benedict grads: Commit 'one courageous act a day' 

May 5: A kinder, gentler Pawlenty addresses Augsburg grads

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Comments (6)

"I’d have wondered: If that’s true, why’s it so difficult to find a job after plunking down $40,000 or so in tuition?"

A good question, but for an apples-to-apples comparison, you have to consider the graduates' employment options if they didn't have the degree. The job market might be tough for college grads, but I think its tougher still for high school grads.

Since 1983 two variables have changed drastically - the cost of an education and variety of degrees. So now students are paying 400% more for their degrees, and are probably getting a degree that is so specialized or trivial as to have no real world value.

I still believe that a degree is the best investment, IF... the degree is directly associated with future employment (ie a civil engineering degree for a civil engineer) AND that a market for that degree actually exists. (Women's studies degree to pursue a career in... teaching women's studies?).

For any student going to college to 'find themselves' and isn't laser focused on attaining a specific career focused degree - I would highly recommend they spend a fraction of the likely ten k's of debt finding themselves in Europe or better yet taking a low/no pay job in the military, peace corp, or internship/apprenticeship that will expose them to many different possible career choices - and THEN pursue an education in the desired field.

Bill, you said it as about as well as it can be said. I am so tired of the old monolithic thinking i.e. degree = success. One thing I googled yesterday was community colleges with dorm life. Apparently it is a growing trend, Minnesota has a couple of c. colleges that would qualify. This would make for a good article Minnpost by the way.
Some years ago I read a study where putting a 10k down payment on a house for a child would be considered a good investment if the kid did not need mobility. This article was more about educational cost than other stuff.
One of our problems however is that the peace corps, interns/apprentishship

sorry my computer skipped. It seems that so many things have a barrier or require credence
Also an honest discussion of sexuality, marriage/non marriage, young mother support, could be included. It would be great to be twenty again but think of the unkowns lying ahead. No wonder they drink!!

I argue against Mr. Gilles statement that the only degrees worth having are those that are specific to a certain kind of job. Liberal arts degrees, such as women's studies, are not designed as job training; they are designed as mind training. Graduates with liberal arts educations are highly sought after because they think critically and solve problems creatively. They are nimble and move more easily through their careers. Just consider how many engineers and architects have been out of work in this Great Recession; their education prepared them for pretty much one line of work only.

Mr. Gilles disagrees with Fed President Kocherlakota but what does he do with his Kocherlakota's statistics -- which are based both on theoretical knowledge and practical experience?

Regarding women's studies -- here are a few career areas where women's studies majors actually hold quite good and useful jobs: HR and personnel firms, counseling, social work, advocacy (as in helping abused women), public health, anthropology, psychology. Some go on in medicine or nursing, specializing in women's health. Some go into law, perhaps family law, or pursue other graduate or professional fields.

It's the same thing with other liberal arts degrees. They provide background in a variety of thinking skills, e.g., analysis, evaluation, synthesis, logic, criticism, design, lateral thinking, creativity, creative problem solving, and so on. Anyone who is prepared in just one area will only be able to do that one thing. Liberal arts is like cross-training, which prepares your whole body instead of just one part; liberal arts prepare your whole mind.