'You can beat the stock market!' Invest in a college degree

'You can beat the stock market!' Invest in a college degree

By Casey Selix | Published Thu, Jun 10 2010 9:01 am

Narayana Kocherlakota

My headline is not a subject line from a junk email.
It’s lifted from the commencement speech of Narayana Kocherlakota, the newly minted president (since last October) of the Federal Reserve Bank in Minneapolis.

Kocherlakota delivered a pep talk and a bit of an investment strategy session in May to graduates of the University of Minnesota’s College of Liberal Arts.

Kocherlakota, a former chairman of the U’s Department of Economics, said the annual rate of return on a college degree is better than the stock market’s.

"What is the expected return on investing in a college education — that is, what will you get back in terms of increased wages per dollar that you invested? Recent studies estimate that finishing college over high school delivers a return of somewhere between 8 percent and 10 percent per year. Is this a big number? Well, historically, the rate of return on the stock market is around 6-7 percent per year. So, by investing in a college education, you can beat the stock market! That’s especially true because the return to a college education is much less risky."

If I had been a parent or grad sitting in that audience, I’d have wondered: If that’s true, why’s it so difficult to find a job after plunking down $40,000 or so in tuition?

Kocherlakota anticipates the reactions from the fresh crop of critical thinkers and their parents.

'Complicating factor'

"Now, there is a complicating factor to this somewhat rosy scenario that’s probably occurred to all of you: We are coming out of one of the worst economic downturns since the Great Depression. Jobs are not in abundance."

Then he recalls the job market upon his graduation in 1983, "when the unemployment rate was actually even higher than it is today."

"Now it is true that when I graduated, the slack job market put downward pressure on all wages, including those of college grads. However, over time, the wages of these June 1983 grads did rise, and the negative effects of the recession were largely lost. Even in a tough job market, my cohort found that college remained a good investment."

If any critical thinkers still feel skeptical, Kocherlakota’s speech is available on the Federal Reserve Bank’s website and it includes a footnote citing the source of his investment information — a National Bureau of Economic Research working paper titled "Earnings functions, rates of return, and treatment effects: The Mincer equation and beyond."

While I was in the cyber-neighborhood, I couldn’t resist checking out the president’s online bio. He was born in Maryland. His degrees came from Princeton and the University of Chicago. He’s the 12th president in the history of the Minneapolis Federal Reserve Bank.

But one of the niftiest features is in a summary on another page — an audio pronunciation of Narayana Kocherlakota.

Trust me. This is exceptionally helpful info for anyone who has to interview Nair-ah-yah-nah Koach-er-lah-ko-tah or introduce him to a crowd.

http://www.minnpost.com/nextdegree/2010/06/10/18805/you_can_beat_the_stock_market_invest_in_a_college_degree