25th May 2011

7IM: We Don’t Need No Education

As the summer season rolls around, financial circles customarily debate the merits of the old adage “Sell in May and go away, don’t come back ‘til St. Leger Day”.  However, no conclusions are ever drawn (because it is a proverb – it’s like trying to empirically prove that “slow and steady wins the race,” and about as useful too).

So, this summer, I’d like to draw your attention to a proper subject for debate – an asset price bubble. However, before you begin marshalling your incredibly sound, reasoned and incisive arguments about overvalued tech stocks, emerging markets or UK Gilts, let me just mention that the bubble being talked of isn’t a financial instrument.  It is in fact Higher Education.

Peter Thiel (co-founder of Paypal and an early investor in Facebook) recently posited that a bubble of the kind that inflated the real estate market has now appeared in university education. He points to high and increasing tuition costs, burdensome debt levels and lack of a guaranteed return on investment; stating “A true bubble is when something is overvalued and intensively believed. Education may be the only thing people still believe in the United States.”

There may be elements of this argument that you agree with. The days of free university education have definitely vanished, as has the certainty of employment afterwards. Last year, the UK Government raised tuition fees from £3,375 a year to an average of £7,500 a year. In reality many institutions will be charging the maximum £9,000 a year for some courses. In the US, the cost of tuition has skyrocketed, going up an annual rate of 5%.

For many undergraduates, taking out student loans is an all too sombre reality. Research claims that students graduating in July 2011 will find themselves with an average of £21,198 in student debt. Their American peers will also find themselves in a similar position, graduating with an average debt of over $27,000. Total outstanding student loan debt is shortly expected to top the $1trillion level for the first time - exceeding total credit card debt.

So at the end of a three year degree, many thousands of pounds, and a barrage of examinations, the final question is: Is it worth it? Unfortunately for students graduating in this recessionary economic climate, the answer could well be no. Our Government is firmly in austerity mode; creation of public sector jobs is about as much of a priority as re-introducing the bubonic plague.  Belief in the private sector picking up the slack is misguided and is far from certain to happen given the pressures here.

Consequently, in the UK 40% of all unemployed people are aged between 16 and 24 and almost one million young adults are jobless, with the highest unemployment rate in London - 22%. The unemployment rate for recent graduates in America is around 9.7% compared with 5% in 2007. For those fortunate enough to find employment, the next few years may be spent grappling with lower salaries and higher living costs, which can only mean one thing. You can expect to be doing your kid’s laundry for some time to come...

I did stumble upon one extreme suggestion (with somewhat tenuous links to history) of what could be done with the legions of youths; send them to war. Said (I hope with tongue firmly in cheek) one blogger, “You don’t see angry young men hanging out waiting to pounce on old ladies during war time. They are too busy getting killed...World War II helped end the Great Depression”

In actuality, unemployment levels pose a significant problem not just for the UK government but for many others worldwide. Soul-crushing youth unemployment has been a major catalyst for the revolutions in Tunisia, Egypt and elsewhere in the Middle East.

Although Thiel’s argument on higher education may find sympathisers, it is far from being rock solid. During an economic boom, people do not question whether a University degree is over-valued. But in a declining economic environment, when consumers’ real incomes are falling, the question is more prevalent. However there are statistics showing that having a university degree still pays; it may not be as much as the pre-Lehman days, but a graduate can still expect to earn more than a non-degree holder. The Economist notes that in the US, average annual earnings for those with an advanced degree was three times that of those with a high school diploma.

Secondly, the speculative aspect seen in housing can hardly be replicated in education. Housing is a transferrable security; prices are driven higher every time a property changes hands as speculators and questionable loans came into play. Education, on the other hand, is a non-transferrable asset. Buying and selling of it does not occur in a market place, and thus spares higher education from being treated in the speculative manner common to traditional ‘bubbles’.

There is no doubt that consumers may be making a gross overestimation of how much the asset of education is worth. Competition amongst universities should be driving down the price of degrees in order to attract top talent. Instead many UK universities are looking to charge near the maximum allowed levels. Universities should look to address supply shortages in certain subjects and cull other programs. For its part, the Government needs to make jobs a priority. Our schools and institutions that were largely designed to serve the industrial revolution have changed little. Perhaps a fundamental change in the way education is delivered is necessary to better equip a new generation.

On a lighter note, those students graduating now are more tech-savvy, engaged and connected than ever before. Many have an entrepreneurial spirit and place a higher premium on creating their own businesses and jobs instead of seeking employment elsewhere. Innovation and ingenuity will be the key to prosperity.

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And finally...With the newspapers currently full of oddballs appearing on Britain’s Got Talent, the travails of the X Factor judges, another series of The Apprentice in full flow and Channel 5 about to re-launch Big Brother you might have thought that the concept of reality (!) TV had been pushed just about as far as it could be – but you’d be wrong.

In a new competition, “Roundabout Idol”, the remarkable “Magic Roundabout” in Hemel Hempstead has been voted the winner.  This feat of civil engineering and imagination which incorporates another eight mini-roundabouts was a clear winner despite over fifty competing entrants.  They included Britain’s oldest roundabout, in Letchford, and also a similarly named road feature in Swindon.

So what now for the winner?  Does it have a major career ahead of it with appearances at Las Vegas or is it destined to disappear among the cruise ship cabaret regulars? 

I’d say the chances of the former would be round about zero.

Aparna Ram
Investment Analyst
Seven Investment Management Limited

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