
Returns to education over the past half-century have beaten the US stock market - known
https://www.economist.com/news/finance-and-economics/21741558-returns-education-over-past-half-century-have-beaten-american
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conjecTech
Wow. I'm a bit shocked. At first I thought the title was a misinterpretation
of the statistics presented in the article by the poster, but it seems that
the author actually offered that comparsion themselves.

'an annual average “rate of return”—actually a pay premium, the increase in
hourly earnings from an extra year of schooling—of 8.8%. The analogy is
inexact, but for comparison America’s stockmarket returned an annual 5.6% over
the past 50 years.'

Those are in no way comparable! Encouraging poor interpretations of statistics
on important issues like this is actively harmful! This has to be some of the
laziest reporting I have ever seen.

At a minimum, can we please change the title on this?

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darawk
This isn't even a misinterpretation of statistics, which is actually
complicated and understandable...it's literally a misunderstanding of how
rates work.

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tripletao
From the article:

> The analogy is inexact, but for comparison America’s stockmarket [...]

So the author thought, "I know this is wrong, but I'll do it anyways and add a
note"? And they literally call the publication The Economist...

The return on investment of education is an interesting and difficult
question, to distinguish the difference between the people who do and don't
seek the education from the difference actually caused by the education. The
best results come from natural experiments, like sudden changes in the number
of university places available; but even those capture only the effect on the
marginal applicant. This of course is mostly unrelated to the article.

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Dwolb
Hm I initially agreed with everyone here that there's no way to really compare
the two since I thought about this on a personal level.

However my current rationalization of the title thinks about this on a
societal level.

If you're the government and have $1B, would you rather fund education
directly (through debt) or invest $1B in the stock market? On average you'd
expect the wages of everyone you funded to grow at 8.8% of which the
government can harvest an average tax rate. Additionally the government can
take an interest rate on the debt.

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whatshisface
The 8.8% figure came from "an extra year of school," which has absolutely
nothing to do with a return on the cost of an extra year of school. The
statistic says nothing about how much that $1B would actually grow.

Is there a trade-off between academia and industry? Sure, but the economist
has made an hilarious pants-down mistake in evaluating it. Maybe the ROI on an
extra year of school would be even higher for the author ;)

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Dwolb
Sure but we can derive it.

We'd have to know the answer: on average how many extra years of school does
$1B fund?

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whatshisface
It still wouldn't be comparable: the 8.8% is from an increase on earnings per
hours worked, not an interest-style return on tuition money. You would also
need to know what people were making on the job.

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Dwolb
Agreed we'd need to figure out average current salary. Any additional info we
need to gather?

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sanxiyn
Note that this is an average. Not all students complete a degree, and this has
large effect on education ROI. If you are unlikely to complete an
undergraduate degree, going to a college is a bad investment.

Bryan Caplan painstakingly calculated return depending on student ability. For
a median student (50th percentile), college is a bad investment.

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cardosof
I know some folks at the World Bank and I'm sure they invested a lot in
education prior to joining - you need a economics-related PhD to become a
junior research analyst there. Therefore, this study is the result of trained
professionals. Having said that, I'm skeptical of the results - the final
numbers are averages but I'd like to see the distributions.

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zawerf
Just curious as a non-economist, how would you even conduct this study in a
controlled way?

You would basically have take two randomized groups both starting with 200k
and have one invest it into stocks and another into a 4 year college degree
and compare net worth a few decades later.

Even then you would only be answering the question of whether that decision
was optimal for that point in time.

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tripletao
You can do correlation studies, and try to control for all the factors that
distinguish the people who enter college from the people who don't, to
distinguish that selection effect from the actual benefit of the education.
There are studies like that; but since you can never be sure you've controlled
for all factors, they're suspect.

An artificial experiment would be nice, but the cost, ethics, etc. make it not
too practical. The best research uses natural experiments, like when some
external factor changes the number of university places available, so that
people who would have gone to college in the 2017 cohort don't in 2018 (or
vice versa). That gives you the answer for the marginal applicant (i.e., the
applicant who was just on the edge of qualifying), though, not the average.

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microcolonel
These things are fun to compare for leisure, but no arguments or prescriptions
can be made from a comparison like this. Business opportunities, including
those represented by listed public companies, provide the majority of
motivation for higher education. Furthermore, unlike the stock market, there
is no direct way to inject funds into higher education and expect returns:
each student is unique, and their reasons for taking on debt or working toward
scholarships are related to the returns they expect when they reenter the
market.

Taken to the extreme, treatment of higher education as a commodity investment
will encourage diminishing returns.

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quickthrower2
If you put that 1 years school money into the stock market, it will keep
giving the 5.6% when you are not working. If you take time out to start a
start up, go travelling, or get sick then the educational ROI falls to 0 for
that time, while the stock market keeps (on average) delivering.

Also capital gains tax vs. income tax.

Also I'm from another country where you could offset the interest paid on the
load to acquire the shares, against dividends, and if the interest paid >
dividends, reduce your income tax bill accordingly.

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vasco
Where are you from? Your government basically gives you an incentive to get
leveraged?

~~~
quickthrower2
Australia

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meirdavis
In most countries where education is cheaper than the US, people don't even
think about this comparison. The main cost of education is the effort, not the
monetary expense.

This article totally ignores the effort of going to Uni.

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lokimedes
Are they factoring in the rent seeking aspects of the stockmarket? This is
only a relevant comparison if the implied effort is similar for both ROIs

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jerkstate
"past performance is not an indicator of future results"

