The Price to Earnings Ratio of a College Degree

P/E ratios are used to determine whether an investment is worth the money. In the case of a stock you take the price per share and divide it by its earnings. Thus you get a chart like this one showing us the S&P 500 P/E ratio over time

Applying the P/E concept to other assets can be helpful as well. If you look at a house, a house can be considered an investment. You buy a house and rent it out for its...um...rents. This gives us the housing version of a P/E ratio, the "house price to rents" ratio.

But along with 401ks and housing, the good overlords at the government and your employer's HR department are ordering you to invest in something else. Education.

Have you bothered to look up what the P/E ratio is for a college degree?

You haven't?

Well, you're in luck. The old Captain has!

Now before I go on you all better darn well appreciate this. This took about 2 hours to put together because the NACE (the source for starting salaries) is REAAAAALLY stingy with their data. So I had to go and search out each individual year at third party sites. Also inflation data for tuition rates is somewhat hard to come by. So if you want to say "thank you" to the Captain go buy my book for a paltry 99 cents and contribute to the Kindle Experiment.

First the data.

Doesn't look like much does it? Well that's because your ole Captain is intellectually honest and didn't want to "scale the y axis" to make this chart look more dramatic than what it is. But he doesn't have to. That chart IS dramatic and let me explain.

The above shows you the "price" you pay for college (tuition) versus the earnings you get from a college degree (earnings). As recent as 2000 you could expect your tuition to cost about 11% of your starting salary. Today in 2011 it is expected to be 16%.

At first you may say, "hey, that doesn't sound like a lot," but keep in mind two simple things.

One, you don't go to college to get a job. You go to college to make MORE MONEY when you get a job. Ergo, the above chart is somewhat misleading because without spending the money (and time) going to college, you would still make some money because you could presumably work anyway. So to be very precise when calculating a college degree P/E ratio it really should be your tuition costs divided by the earnings premium you would make over just having a high school diploma. Regardless, the price is going up.

Two, this chart speaks nothing of the drastic increase in the number of unemployed youth. If we were to incorporate all the "$0" starting salaries many of you recent college graduates are experiencing, I think you would see a DRAMATIC increase in the college degree P/E again suggesting you aren't getting your bang for your buck.

But still, I don't have to rely on adjustments or theoreticals to make my point. I'll simply present another chart. A chart showing the increase in tuition costs versus the increase in starting salaries. In theory if we index these together and start at the same point, they should increase at roughly the same rate, correct?

Well looky there kiddos! In just the past decade tuition has gone up nearly 100% while the starting salary (of that absolutely "necessary" sheepskin in "11th Century Middle Eastern Feminist Gender Studies") has only gone up in value by about 30% (and let's not forget about how that's essentially a 0% real increase when we account for inflation!)

So let me explain to you young kiddoes out there who voted for "hope and change" and thought Barack Obama's Magic Unicorn would miraculously fart out jobs for all of you.

You've been had.

You've been scammed.

You've been cheated.

And this has been done to you by not only my generation, but the generation before that.

Understand you weren't the only ones who came up with the brilliant diabolical plot of majoring in some wishy washy subject and then secretly hoping to get a cushy, overpaid government job. No, many people before you majored in "education" or "sociology" because they too "wanted to help the children" (while deep down inside we all knew all along it was just to get summers off and avoid calculus). There's two whole generations before you that had the same idea. And guess where people who major in "philosophy" or "hypenated American studies" end up working?

You got it.

Teaching you kiddies in college.

Of course, along with social security and medicare, this is just another little generational racket they have going on the side. See, they've told you since you were little ones you needed a college education. What they failed to tell you was in what.

You know all those "nerdy" Asian kids and square American boys you laughed at with their "stupid" chemical engineering degrees? Yeah, that's what you should have majored in.

But you see, if everybody majored in chemical engineering then the older people (who had the exact same idea you had) wouldn't have jobs. Remember, they majored in English and anthropology too. They have masters degrees in "sculpture" and "theater." And since they couldn't find jobs in the private sector they had to create entire studies out of whole cloth in....

(are you ready for it?)

(can you guess where these people go?)

(are you sure?)

THAT'S RIGHT!

ACADEMIA!

Studies that don't produce anything of value to society, but can be sold to easy marks like you!

So let me explain to you what's happening and why you are sitting there with an over-bloated student debt (that no doubt I'm going to have to bail you out of). You see, in society STUFF OF VALUE has to be produced. You can't just major in Socialism Unicorn Farts or Political Science like your beloved hope and change leader (oh, wait, he was a professor too, wasn't he?). In the end for society to thrive, let alone survive, you must produce something of value. As I talk about in my seminar on worthless degrees, take out a sheet of paper, list everything you would like to buy or own and the list the degrees of your friends and ask yourself;

"Do we major in the fields that is necessary to produce the I-Pads and X-Box's and cars we want?"

The answer is no. This also explains to you why we have a trade deficit with China.

But also understand you are on the receiving end of what has been a trans-generational scam. Creating "fake" industries so people can have hobbies instead of creating real industries so people may have wealth. Notice the charts below. These charts I discovered when trying to find data going back to the 1940's (because ideally it would be great to calculate the above charts and see what the P/E ratio was for a college degree back then, but the data is just not there). What you'll notice is that sure, under your parents or grandparent's generation a college degree would help, by about the 70's in terms of real dollars there was no upshot. Matter of fact when you look at the liberal arts degrees they were simply a waste (also notice how they didn't start until 1962, gee, I wonder why? Could it be..ummmm...hippies?)

But why the push for college then? Why were you told to go to college? And why didn't anybody tell you about worthless degrees? Two fold.

Most of your parents didn't study economics, let alone see these charts. They just remember their own experiences and the advice at the time was hardly wrong. It's just there's a SEVERE ignorance when it comes to economics in this country and people just plain didn't know. But now we get to pay for it.

And second, lets not forget about all those burnt out hippie professors that need your hard earned money (or your parents money or the taxpayers money) to pay him to lecture you about the evils of capitalism in a "Peace Studies" program.

So in the meantime kiddies, I hope you enjoy you little sheepskin there. I hope you enjoy "going green" by recycling or reusing grocery bags or whatever else you were told to do by your indoctrinators. Because in the end, no matter what you were told, no matter what you believe and no matter how much you may have been programmed to hate it, reality wins in the end. And the reality is you just got scammed out not just your money, but a sizeable chunk of your youth and your future is bleak. And no amount of naive childish "hope and change" is going to fix it.

Enjoy the decline!