Monday, April 14, 2008

The Relative Returns to Higher Education

The value and importance of higher education depends on its returns relative to the investment market. The inflationary, low interest rate regime of the past quarter century has increased returns to investment in stock and real estate markets and diminished returns to education. Monetary policy has done so because inflation reduces the present value of future earnings from labor. Real wages have increased slowly while the stock market valuation has increased rapidly. That is, low interest rates increase the value of stock and real estate investments but reduce the present value of future earnings. A prospective student who invested in the stock market instead of education during the post World War II era probably would have made the right financial decision. (He or she would have made the right intellectual decision as well.) Because inflation reduces the present value of future earnings but increases returns on stock and real estate, financially smart families invest in stocks rather than in education. Intellectually smart families home school. But the mania for higher education exploded at the very time the financial (and intellectual) value of higher education was diminished. It is a case of "buying at the top".

No comments: