Bill Gross: "College Is Worthless"

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A few weeks ago we pointed out what may be the most troubling (and Marxist) observation in America's labor arena, namely that the labor's share of national income has dropped to the lowest in history as a record number of Americans now focus on wealth creation through assets (i.e. owners of capital) instead of labor. In his just released latest letter (below) Bill Gross piggybacks on this observation in what is one of the most scathing notes blasting the traditional of higher education, and in essence claiming that college, as means of perpetuating a broken employment status quo whcih redirect labor to a now-expiring Wall Street labor model, is now worthless: "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." And why college graduates have only a 6 digit loan to look forward to: "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." And some very bad news for the communists in the White House and the chimpanzees in the San Francisco Fed who continue to believe that unemployment is anything but structural: "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."

From Bill Gross of PIMCO

School Daze, School Daze Good Old Golden Rule Days

  • The
    past several decades have witnessed an erosion of our manufacturing
    base in exchange for a reliance on wealth creation via financial assets.
  •  Fiscal balance alone will not likely produce 20 million jobs over
    the next decade. Government must take a leading role in job creation. 
  • A growing number of skeptics wonder whether college is worth the time or the cost.

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.