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Townhall...
The Miseducation of
America
By Armstrong Williams
Back in the ‘good ole days’ (which usually tend to have occurred
exactly one hundred years before the phrase is uttered), doing business
in America was simple. Entrepreneurs completed deals using only back of
the envelope calculations and a firm handshake. They didn’t need any of
those Wall Street wizards with their fancy forecasting and analysis
methods. Big Government wasn’t looking over your shoulder or strangling
you with red tape. You didn’t need a fancy college degree to make
something of yourself. All you needed to achieve wealth were
willingness to work hard and a spark of inventiveness.
A profile of the typical millionaire in the United States seems to
confirm this narrative. Most millionaires, according to the seminal
book, The Millionaire Next Door, didn’t make their money in some highly
complex business. In fact, it was usually some ordinary business – say
construction or dry cleaning – that vaulted them into the ranks of the
wealthy. Although fairly educated – almost 80% have a college education
– education was not the distinguishing factor that accounted for their
wealth. Nor was it above average performance in the marketplace,
inheritance, or even the type of profession they occupied. The single
biggest factor among them was their propensity to save.
Wealthy people, on average, save a far higher percentage of their
income than their non-wealthy counterparts. Some would argue that of
course the wealthy save more, because they do not need as much of their
income to cover living expenses as ordinary people. But the data refute
this. The propensity to save is a precondition, not a result of wealth.
On the other hand, in some professions which demand a higher
‘appearance’ of status – say doctors or lawyers – people tend to live
at or above their means. They save a relatively small amount of their
income, and have fewer investments in stock, real estate and other
productive assets.
Although highly educated and respected in their fields, they are also
some of the most highly leveraged in terms of debt. Interestingly,
their education seems to play a part in their failure to accumulate
wealth. By delaying their entry into the work force through long
educational careers, and accumulating consumption-related debt, many of
today’s professionals start out in a hole that they never – despite
their high intelligence – seem to dig themselves out of. It is telling
– and a bit shocking – that even President Clinton (one of the most
successful politicians in modern history) – says he did not have a cent
to his name before he left the White House after two terms as
President. How could this be? Here you have a family with two Yale law
degrees and a Rhodes scholarship between them, years of working in
Government and private practice – and they could not accumulate any
wealth?
It is not uncommon to meet these types – the highly pedigreed
professionals who, at mid-life resign themselves to dying with their
student loans outstanding. While it is common for ex-Presidents to give
speeches and receive honoraria, the Clintons seem to have created a
cottage industry out of paid media appearances and book advances. In
the respect, they are somewhat reminiscent of the aging baseball stars
who earn a living by signing autographs and memorabilia at trade shows.
Trading one’s popularity as a sports star however, seems slightly less
degrading than spending ones’ post-White House years as a permanent
campaigner. But when you’ve got your student loans and your children’s
student loans to pay, what are you going to do?
Paradoxically, those self-made millionaires that earned their wealth
over a lifetime of work and savings – tend to want something different
for their children. The parents of an immigrant Indian family that
saved enough from working at a 7-Eleven to eventually acquire their own
franchise do not want their children to follow in the family business.
They want their kids to get an elite education and become doctors and
lawyers. In a sense, these are not strictly economic aspirations – they
are status symbols. Education, like fancy cars, homes, and jewelry is
not always an investment. Sometimes it’s a form of consumption.
What’s the difference? The true test of whether an education is an
investment or merely a form of conspicuous consumption is whether the
degree or skills one learns is likely to increase one’s earning ability
by more than the (time and monetary) cost of the education. This seems
like a simple process to gauge – much like a back of the envelope
computation – but it is something that many college graduates fail to
clearly consider before incurring huge debts and spending years
collecting degrees. While college graduates earn on average more than
non-graduates, they tend to enter the work force later with more debt.
This is especially the case with people that spend on ‘name brand’
educations. It is increasingly clear that there is a disconnection
between the price and the value of higher education.
It’s obvious by now that the latest collapse of the U.S. stock market
and the ensuing recession was spearheaded by experts – those same
people who received fancy degrees from Ivy League institutions. They
sold the public on their complex mathematical models purporting to show
huge profits – all the while masking the risk of a total blow up. In
many respects, this is the societal effect of a miseducated population.
It is the result of an over-reliance by many people on the advice of
experts, and the reliance of those experts on theoretical constructs
that have little bearing on the real world. It is a classic case of
mistaking the map for the territory. Popular writer and educator Nassim
Taleb, when describing the cause of the market collapse, was blunter.
He aptly describes it as a case of “scholarship without erudition.”
Taleb’s argument is simple yet nuanced. By concentrating for a long
time on complex problems, experts tend to become experts in solving
known problems -- such as the probability of winning a casino game
(where all of the possibilities are known). But this tunnel view
prevents them from considering the broader factors that account for
real world events in which there is no complete information – be it
business performance, the stock market, or the riskiness of complex
financial derivatives. In part, it is the level of education that
deludes them into believing that they can manage the complexity of
making large bets for small gains.
Under conditions of uncertainty that entrepreneurs confront in real
word business situations – tunneling (or focusing on known problems) –
is far less effective than remaining open and widening one’s
perspective. Remaining open requires the ability to suspend belief
about what’s happening, to get out of the textbook and into the
decision under imperfect information. This type of perspective is
becoming a lost art in today’s world of hyper-specialized experts.
Read it at Townhall
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