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Wisconsin or Minnesota

A common meme among my liberal friends is that Governor Scott Walker has taken Wisconsin to the brink of disaster with his right-wing public sector union busting. And that billionaire 70’s star child Mark Dayton, who has raised taxes and spent a bunch of money and raised the minimum wage, has led a miracle of liberal utopianism in Minnesota.

What’s the reality? Well, I decided to take a look at the BLS to see how much truth there was to this meme. And I found the following graphs.

Without cheating, can you tell which of the below is Minnesota, and which is Wisconsin?



While it looks like the recession hit one state a lot harder than the other, the employment recoveries look very similar.

Because they are. Here is the graph from the Star Tribune that normalizes the job recoveries of “selected” Midwest states:

Midwest Job Growth Strib

While Minnesota is doing a little better than Wisconsin, it’s the real-world equivalent of a rounding error. The real Midwest miracle has been North Dakota.


ROI of College Going Way Down

It’s fall, and that means college for millions of kids who have no idea why they’re going back to school even after The State has freed them from the educational industrial system (i.e. the little rooms ruled by the boring adults they were locked up in for twelve years). It also means the media will report out-of-context statistics about the value of college to fool people into wasting more time and money on a failing asset:

“Despite falling wages and rising tuition costs, the value of a college degree is still unquestionably high, a new report shows.

A college degree today is worth $272,692 in lifetime wages — more than three times its value in the 1980s ($80,000) and more than double its value in the 1970s ($120,000), researchers from the Federal Reserve Bank of New York found. At its highest point, in 2001, the net value of a college degree was $338,000, according to raw data from the report.

But the Great Recession, which brought widespread underemployment and record-breaking student loan debt for college graduates, has greatly slowed that growth spurt. The value of a college degree has fallen 11% since 2007.”

I grabbed the graph in the article:

NPV Bachelors Degree

Looks like a good deal, but… context. Net Present Value is great, if it is presented with other metrics like opportunity costs and return on investment (ROI). A quick Google search finds the following graph about the rising costs of college (and this graph is in agreement with hundreds of others based on universally accepted data):


As one can see, the costs of college are quickly approaching the NPV of a college education.

In 1980, you are getting a 6:1 return on investment with a college degree, but by 2006 you’re down to 2:1. And remember, NPV here is calculated for the lifetime of the graduate. Most investments that take fifty years to get the full return on investment are expected to do better than a simple doubling (this is a gross simplification of NPV and ROI, I know we’re not technically talking about a “doubling” of the investment, but there’s no reason to get too complicated here.)

Since all resources have alternative uses, what if you took that 120,000 dollars and invested it in the world economy through something like Vanguard’s Global Equity Fund? It turns out you can expect a 9% annual return (assuming a lack of alien invasions or deadly meteors or other calamity) on that investment. This investment has a NPV of $322,000 assuming a 2.2% annual inflation rate. If you add four years of full time work at minimum wage to that number you get $386,000 dollars. So not going to college, getting a job, and investing the resources it would take to go to college and putting them in the market gets you a larger return than a college diploma. This is just an example, I obviously don’t have the clairvoyance to predict if the global economy will grow at such a rate. I present it only to point out what is missing from the article.

The value of a college diploma is going down while the costs are going up in a flailing national economy that has a ridiculously high underemployment rate. Borrowing to pay for college is considered a wise move by most of the people talking to these kids. Someone needs to present an opposing view so they understand the risks. In my view, college students are heading towards a cliff. And the rest of us, especially our media, need to get serious about the problem.

Chart of the Day:



Why Everyone Screws Up Their Retirement

Because it’s math.

It’s actually not really all that mathy. Whenever you get a paycheck, move the decimal one space over to the left, and throw that amount of money into a separate account that you don’t draw money from except for emergencies. If you want to really get complicated, put that money into an IRA and spend an afternoon looking up “index funds” on the internet. You’re done. As long as you work during your working years, it will be impossible not to have a retirement fund. Avoid debt like the plague, and you will live within your means and not be broke. For most people, this is enough, and yet most people can’t accomplish this simple setup (we’re going to exclude people suffering from some calamity, for simplicity).

I always wondered why, and I have talked to scores of people over the years about finance, and as far as I can tell there are two complaints. One, it’s boring. Two, it’s math. (In fact, #2 explains #1; people assume it’s boring because it’s math.) Students, if they learn nothing else from our public schools, learn math is boring. No amount of persuasion can change this attitude.

The consequences are awful.

Money is the foundation of modern life. We work. Why? Well, among other things, it gets us money. We want goods and services… what do we need? money. We have families, how shall we feed them? Whatever we do, we buy it with money. Everyone is obsessed with money. Our entire culture is centered around it. And yet, despite the fact we’re slaves to money, many of us don’t want to talk about it, read up on concepts relating to money, or find out ways to make ourselves less of a slave to money.

Money is literally numbers. Our currency is math. It’s not gold or silver or hours of labor. Our medium of exchange are numbers, just numbers, often printed on paper.

The only way to be successful with money, and therefore be successful in life, is to defeat the mathophobia. And that’s impossible.

Some thoughts on the minimum wage

– America is a really bad place to do research on the minimum wage. Since WWII, we’re the leading world economy with high growth and a steady stream of immigrants. It hasn’t been until recently that these trends have stalled. The minimum wage in the past was meaningless, and it only means something now because our growth has stalled. It is in fact growth we need to consider, not the minimum wage.

– Because for a long time the minimum wage was meaningless, research done on increasing the minimum wage in those high growth areas will be completely inapplicable, the results are non-universal. What has to be done is find what the market rate is for entry-level unskilled workers, at the local level, and then experiment in a controlled way with minimum wage. Unfortunately, this borders on the unethical. Not that such a thing as ethics would discourage the government from trying stuff.

-Why would it be so hard to have limited lifetime exemptions to the minimum age? Why can’t we make a law declaring that for the first year of employment, there is no minimum wage, than gradually increase the allowable wages. thus, after a few years, the exemptions expire and the individual has to be paid the higher minimum wage (and we can even include a limited exception under circumstances like switching careers or internships).

Things are Good Enough, Apparently


Yeah. Good Enough.


Random Link


Random Link


The Mathematical Possibility(?) of Retirement

 CappyCap did an interesting article on why there’s a strong case that people will be unable to retire.


retirement (Photo credit: 401(K) 2013)

He did it from the perspective of people in 1st world countries (or near 1st world) and used securities (such as mutual funds) as the primary vessel of retirement funds. And, in my opinion, he showed retirement really is out of reach for most people.

But I wasn’t 100% satisfied that retirement, at least in theory, was mathematically impossible. So I decided to do some number crunching myself, focusing on the United States.

Based on rough estimates of current demographics, about 3.6 million people reach age 65 (the age of retirement in the US) every year. Using Clarey’s number of 1 million dollars, the necessary amount estimated to comfortably retire, it would thus take 3.6 trillion dollars to pay for the retirement of our population this year. Our current GDP is about 16.7 trillion dollars, so, about 22% of our current GDP would need to be set aside, in some form or another, for our retirees.

In theory, we should be able to fund retirement. We have a 15% tax on employment, known as FICA, that should be able to provide for most people. Combined with FICA benefits, a person would only need to save 5% of their annual income to cover the rest of their retirement (we’re ignoring inflation and compounding interest for the sake of simplicity). Unfortunately, as we know, Social Security and the other programs supported through FICA taxes are fatally flawed programs, poorly designed, poorly managed and completely unfixable.

If, instead of FICA taxes, we simply required everyone with a job to set aside 15% of their income in individual retirement accounts that would store their wealth in a diversified portfolio (a mixture of commodities, national and international index funds, corporate and public bonds, and cash) about 60% of our population could retire at age 65. Those without jobs, or those who are hit with misfortune,would require additional assistance.

From another perspective, our government takes in about 17% of GDP in tax reciepts, so if all our government did was provide retirement, it could cover 77% of our net retirement needs.

So, retirement is mathematically possible for those of us in the United States, even if it’s not very probable due to government ineptitude.

The math gets better over time. Our population grows at about 1%. Our GDP grows, at least right now, at a rate of 2.5%. Over forty years (number not used by accident, we get done with our schooling and apprenticeships at age 25, and work until age 65, and this is forty years), if we compound the 3.6 trillion dollars needed to retire at 1% and do the same for our current GDP at 2.5%, we find out that in forty years, ceteris paribus, we’ll need about 12% of our GDP to support retirement. From this perspective, the adage that a person should save 10% of their income for retirement appears completely true.

Unfortunately, in a country where 30% of our income is gobbled up by the government, we would need to save 17% of our after-tax income for retirement and find a safe place to invest it. And for many reasons, the idea of safe investing in this current environment is ludicrous.

Random Link