Letter to Jeff Madrick regarding "Education Is Not the Answer"

See:
http://harpers.org/archive/2013/06/education-is-not-the-answer/

My letter to Mr. Madrick:

Mr. Madrick,

I thought "Education Is Not the Answer" was very good. I have been skeptical of the "Education IS the answer" arguments for a long time. 

My degree is in Finance and one of the basics of Finance is "net present value" which a way to determine present value of something given certain assumptions, payments etc. NPV analysis is used all over the place in business and finance but -tellingly- has not been used in any of the 'important' studies which purport to show the importance of college education WRT earnings/wealth.

A NPV analysis typically works by asking what is the current value of a stream of future income. Typically what is being valued is a loan or a business (how much should we pay to buy a business that is making a profit of X). The core concept is that you pay something now to get something later and given your assumptions on interest rates, future profits and so forth, how much should you pay.  This is a core concept of Finance and obviously could be used to estimate the value of a college education. But it isn't. The analyses I have seen on the value of education simply calculates the increased earnings that college graduates attain over their career and do not consider the up front cost at all! But there is (of course) a substantial up-front cost to college: not just the payments and loans and interest on those loans but 4 years making very little or no money vs. 4 years of employment. During those 4 years of employment a person can make contributions to a 401K, has withholding for Social Security and has 4 years seniority at the end where a college grad is starting for 0 with no 401k, and 0 into Social Security. This is significant. On a purely financial basis one needs to make a lot more money later to make up for all of that.

But no analysis that I have seen on the value of a college education gets into NPV - they simply calculate the increased earnings of college grads and say oh how great that is - without rigorously considering the costs. The costs are important! The lack of subjecting the costs to a a rigorous NPV analysis caused me to be skeptical of studies purporting to show the benefits of college (in a financial sense) a long time ago. 

But it gets worse. The "value" of college seems to be to broad a concept. It's like asking what is the value of living in New York City. The average income in New York is very high of course. But there is a big difference between Manhattan and the Bronx, and there is a big difference between being transferred to New York by an employer and moving there "on spec" so to speak. If someone asks "is it worth moving to New York?", you would need a lot more information before you could answer intelligently. A college education is likewise a very broad concept. There is a big difference between majoring in English vs. Electrical Engineering. 

But it gets even worse. How does an English major fare if he gets an entry level job and never gets any further education vs. an English major who goes into sales, gets and MBA had has a laser like focus on getting a corner office job someday. This latter English major's income stream will likely be far higher than the former. 

What is more important: level of education/skill or job title in determining who makes a lot of money. Where is the stronger correlation: level of education/skill to income (and income gains) or job title X (such as CEO) to income and income gains. I suspect the stronger correlation is to job title. 

I suspect that an there is a strong correlation between level of authority/management and income gains over the last 30 years. IE if you are in upper management of a sizable company then it's pretty likely that your income rose more than most people. I also suspect there is a strong correlation between money management and income gains over the last 30 years  IE if you in the management team of a hedge fund then then it's pretty likely that your income rose more than most people. Finally I suspect that professional athletes and major entertainers have made strong gains over the last 30 years. I also suspect that if you are involved in making something your income dropped. Think assembly line workers, and industrial engineers.

And how about this: what happened to your income over the last 30 years if you were in a job that used to be unionized but no longer is. Think assembly line worker. I'm guessing that if you are in this category your income over the last 30 years took a hit.

I use the word "suspect" and "guess" above because it's a) what I see all around me but b) you don't see a lot of rigorous analysis/reporting on it. You see a lot of reporting on the so called "1%" but you don't see a lot of reporting/analysis on who they are. When that subject comes up the platitudes fly regarding education and skills. 

The article "Education Is Not the Answer" seems to imply that a big cause of income polarization over the last 30 years has been the decline of unions which decreased the the bargaining power of workers and strengthened the hand of management. Perhaps there has been a substantial transfer of wealth away from (industrial and other) workers and to management (especially upper management). But this is certainly not the story we hear in our media day after day. We hear a bright sunny story about skill and education. It is important to know which one is more accurate.

And as to the value of a college education for the average person: how about a NPV analysis.

The energy bubble

Currently the media is filled with stories about a so called "Energy Revolution" that has occurred and is supposedly unleashing vast quantities of heretofore unknown or unusable hydrocarbon resources - mostly oil and natural gas.

This is nothing less than the intellectual fraud or our times and what we are seeing now actually just another bubble. It's an intellectual fraud almost on a par with the "new economy" of the dot com era and the crazy idea of 10 years ago that the housing market could not see a general contraction.

In a nutshell the idea is that a technological revolution has occurred over the past 10 years that has allowed the oil and gas industry to a) discover reserves they did not know about before and/or b) exploit reserves that were known about but to expensive prior to this "revolution" to exploit.

When the discussion moves to what exactly this technological revolution is the discussion gets hazy fast. Or downright inaccurate to an almost silly level.

Before I get into more details on this fraud let me tell you what has occurred: the price of oil has remained high enough for long enough so that long known about reserves of expensive and dirty oil can be exploited at a profit. The price has remained high because the ready supply of conventional light sweet crude is no longer enough to supply world demand and there no other choice but to either exploit expensive dirty oil or use more unconventional sources (solar and wind specifically). Both are happening.

What is my evidence? Exhibit A is the price of oil. As I write this the price of WTI crude is 95.61. Adjusted for inflation the price during the 1979 oil shock didn't even reach 80. The price of crude oil gained consistently from 2000 to 2008 and peaked at a bit over 135 in the summer of 2008 before dropping to just under 75 and then going back up to a consistent range of between 85 and 105 for several years.

The marginal cost of production of Saudi Crude is about 12/barrel, and the marginal cost of production of conventional Texas crude is about 25/barrel. The marginal cost of (fracked) oil in North Dakota is about 80/barrel.

From http://www.reuters.com/article/2009/07/28/oil-cost-factbox-idUSLS12407420090728

 Oilfields                   Estimated Production
 /source                        Costs ($ 2008)
 Mideast/N.Africa oilfields         6 -  28
 Other conventional oilfields       6 -  39
 CO2 enhanced oil recovery         30 -  80
 Deep/ultra-deep-water oilfields   32 -  65
 Enhanced oil recovery             32 -  82
 Arctic oilfields                  32 - 100
 Heavy oil/bitumen                 32 -  68
 Oil shales                        52 - 113
 Gas to liquids                    38 - 113
 Coal to liquids                   60 - 113

If there was enough in the first two lines above (conventional oil) to satisfy world demand then the price would collapse from what it is now (95.61) to at least 40/barrel (perhaps lower) and heavy oil/shale production would evaporate.

We have had a revolution all right but it has been a economic revolution. Oil prices are now persistently high enough to make it economic to exploit expensive dirty oil.

Lets look at some of the details of the "technological revolution" fraud.

Lets start here:

New technology propels 'old energy' boom

By JONATHAN FAHEY | Associated Press
http://finance.yahoo.com/news/technology-propels-old-energy-boom-155331085.html

what are the nuts and bolts of this "revolution?" horizontal drilling and fracking. Fact: horizontal drilling has been done since the 1930's and fracking since the 1960's. At no time then or now could they get the process such that the oil drilled would be price competitive with conventional oil. This article also talks about "imaging techniques" and "computer technology".  Both are of course used and both are better now then they used to but it's a fraud to call them revolutionary in the sense of enabling a technological hydrocarbon boom. Fact: nothing revolutionary from a technological standpoint has happened in this industry in the last 20 years.

The power of this "technology propels energy boom" story is that it tells us what we want to hear (and not coincidentally what the oil industry wants us to believe). Reality is not so nice. Also, reality is more complex. A simple happy story sells -  remember room temperature nuclear fusion? A complex story about high prices and hard choices does not sell.

This current happy story is so compelling that we now read things reminiscent of the dot com boom:

The Dark Side of Energy Independence says: "America’s oil and gas bonanza will drive down global energy prices, undercutting the foundations of petrostates everywhere " Talk about wishful thinking! The price of oil has not even dropped at all (see data above). The Dark Side of Energy Independence is filled with the kind of overconfident/wishful thinking we saw during the late 90's.

Power Shift "Energy Boom Dawning in America" has more happy story/overconfident talk.

And here's an article on exporting natural gas. Talk about counting your chickens before they hatch!

And here is something on the glorious wonders we see as the Energy Boom begins to ripple through the US economy.

In these stories we hear talk about how a) the U.S. will soon be energy independent, b) the U.S. will overtake Saudi Arabia in production c) the price of oil and natural gas will drop. d) it's all based on a technological (not economic) revolution.

But wait a minute....the price has not dropped (as I discussed above). Notice how those articles either completely miss that point or skirt around it. The problem is that the steady high price of oil over the very same time frame as this so called "technological revolution" blows a huge hole in the argument.

The facts are that pretty much the same technology is used now as was tried in 1979 (and earlier) but now the price of oil is high enough to make it economical. What we have had is an economic revolution not a technological revolution. 

There is plenty of dirty, hard to get unconventional oil and other hydrocarbons out there (and we knew a lot about them in Jimmy Carters time) but we have not had a technological revolution that has lowered the price. We exploiting these expensive and dirty sources now because we have no better choice. In 1995 we did have a better choice. 

What will happen now? The price of oil will continue it's long steady march upward (with some reversals of course) - because the easy oil is always drilled first. Conventional crude was preferred over unconventional because it's easier and cheaper, and the easiest unconventional crude will also be drilled first. The era of cheap oil is over and the price will continue to rise.

It appears that the lowest cost alternative energy is wind and the cost equivalent energy price of wind is approaching that of some fossil fuels. Once oil is more expensive than wind (or solar) on an energy equivalent basis we will see wind (or solar) energy explode. That day is coming and that will be the real news.

James Stewart needs some common sense

James Stewart in "

In a New Era of Insider Trading, It’s Risk vs. Reward Squared"

writes:

"Mathew Martoma, a former SAC trader who was accused last month of using secret informationto help SAC gain profits, was paid a $9.4 million bonus in 2008, when he was just 34. At the same time, the cost of failure can be catastrophic. When he failed to replicate that kind of information, he was fired a little more than a year later. (Mr. Martoma pleaded not guilty to the charge, and, through his lawyer, has denied any wrongdoing.)"

Stewart thinks this outcome is "catastrophic?" On what planet. Catastrophic might be having to pay back 18.8 million. Or going to prison for a long time.  But just losing your job and keeping the 9.4 million made under suspicious circumstances? This is a catastrophe?

Stewart needs to read the final chapter of 

Antifragile: Things That Gain from Disorder by

by Nassim Nicholas Taleb

that chapter is titled "Skin in the game" and in it Taleb shows that in economics and ethics, systems where people have no 'skin in the game' are extremely fragile, those where they have "soul" in the game are antifragile. Mathew Martoma had no skin in the game - he was trading SAC's money not his own and was not bound by any contract or law to make up for his losses. It was a classic "heads I win, tails you lose" situation. 

To think that the prospect of losing ones job is "catastrophic" in this kind of circumstance takes, well a profound *lack* of common sense. If a 43 year old auto worker in Michigan making $65,00 loses his job when the plant closes down and he has a mortgage and 3 kids, *that* is pretty catastrophic. If someone at age 34 makes 9.4 million as a trader in year X then loses his job, he can literally live off that money for the rest of his life. Or start a business. Or get another job as a trader somewhere else. Or go back to school and get another degree. Or travel the world...or..or...or. It really takes a profound lack of common sense to think this outcome is "catastrophic".

As I said above, "catastrophic" in this instance would be jail or being forced to pay back any ill-begotten gains with damages. 

Stewart needs to read the last chapter of "Antifragile" and get some common sense!

 

Remember: they create the wealth

Note that according to our media and popular culture guys like Matty Moroun - billionaire and the according to Forbes the 321st richest American, "create the wealth" and for that reason should be celebrated.

He owns the Ambassador Bridge linking Detroit and Windsor Ontario and also ownes several associated businesses, duty free shops etc. He also owns a lot of property in Detroit.

Our culture tells us that such people should be honored and celebrated because "they create the wealth". Without them the rest of us would be poorer. Attacks on them are generally motivated by jealousy we are told.

Reality tells a far different story. He's pretty much of a monopolist and an operator who is very good at playing the system. He is directly fighting a new bridge which would be financed partly with public money. This new bridge would a) increase the amount of traffic possible between Detroit and Canada, b) create many new jobs in the short run and retain some of those jobs for a long time, c) give the Ambassador Bridge much needed competition.

The Moroun family is fighting the new project tooth and nail and according to one source has threatened to "destroy" it completely. IE prevent the creation of new wealth.

Wait, I thought that entrepreneurs were in favor of competition. I thought they *created the wealth* by competing hard and welcoming new competition wherever and whenever it arises. In this case it looks a lot like Matty Moroun and his family are fighting to keep monopoly power. And it looks like that monopoly power has been instrumental in making Moroun and his family very very rich - at the *expense* of the rest of us. Of course he wants the gravy train to continue.

And the property he owns in Detroit? Slums mostly.

But remember, regardless of the facts, our popular culture tells us that these guys "create the wealth".

Sources:
http://tpmmuckraker.talkingpointsmemo.com/2011/06/koch-backed_afp_admits_to_posting_fake_eviction_no_1.php
http://en.wikipedia.org/wiki/Matty_Moroun
http://www.mattymoroun.com/
http://buildthedricnow.com/2010/06/01/466/

Why we don't have more progress in AI

1) Deep ambivalence in the public, elected officials and the elite (IE everyone) about whether it's good to have AI move forward in the first place. The diversion into talk about 'morality' and 'ethics' whenever AI discussed reveals this ambivalence. You don't get the same kind of discussion at a conference devoted to materials science. People are not afraid of a stronger beam in a bridge they way they are of 'better/smarter/more capable' AI.

2) Many vested interests would have a lot to lose from better/stronger AI so they can be counted on to be ambivalent at best towards the prospects of better AI.

Examples are the professions of:
Accounting
Law
Medicine

and many more.

Take Law for instance. Would it possibly be a benefit for many people to have some sort of a system that could understand natural language and answer (or at least start to answer) routine legal questions? Of course. And how would our legal profession feel about that. We can be quite certain that the legal profession would be ambivalent at best - and probably hostile to the whole enterprise.

Professions like law, medicine, and accounting are regulated and in order to practice in these fields you need some sort of standing (typically a degree and then you must pass one or more exams). How exactly would some AI entity gain the the standing to practice in these areas. This has not happened yet and is not likely to happen soon. Hence for AI to operate in these fields it has to be under the control (used as a tool) of a human provider. IE a law firm can use AI for legal research but you or me cannot. See:
http://www.nytimes.com/2011/03/05/science/05legal.html

Note that automating discovery has cost some firms lots of billable hours. How exactly would the legal profession feel about an online agent available to answer routine legal questions. Currently I would have to go to a law firm and pay a retainer (hundreds of dollars typically) just to attain the right to get a question answered.

To show how tenaciously (and effectively) professions can fight automation (much less AI) look at the Real Estate field. Ten to fifteen years ago the the prevailing feeling was that the traditional methods were doomed. Who would need/want the MLS system after the arrival of the internet. What would happen to 90% of the real estate agents out there charging 7% when people could just go online. Surely a website or a set of websites would disrupt the whole thing. But it's 2011 and the real estate field operates pretty much the way it did in 1980 and still charges 7%, the MLS system is not just alive but as dominant as ever and can only be accessed by a licensed real estate professional. Most tellingly, the typical real estate commission is the same as it has been for decades. See:
http://www.city-data.com/forum/real-estate-professionals/7423-whats-typical-realtor-commissions-5-6-a.html

7 percent (or maybe 6 if you really negotiate hard) was standard in 1980.

The MLS system was closed in 1980; you had to be an agent to get access. As of today (May 14, 2011) it still is: "Most MLS systems restrict membership and access to real estate brokers (and their agents) who are appropriately licensed by the state (or province); are members of a local board or association of realtors; and are members of the trade association" source: http://en.wikipedia.org/wiki/Multiple_Listing_Service#Limitations_of_access_and_Criticisms_of_MLS

Any entity (human or AI entity) needs interaction and feedback in order to progress but in most real world cases AI entities lack standing and hence cannot interact and get feedback directly. They have no 'agency' to act on their own and this in my opinion hobbles progress in AI.

Maybe corporate person-hood could be helpful. Perhaps a corporation could be formed with some sort of AI system as it's main component and then perhaps this entity could be given the license to practice law (or accounting or medicine) - given that a corporation is legally a person in some respects.

Some in the AI field may be thinking of a more general solution - something that could 'do it all' so to speak. My response would be to look at life: do we have one ultimate life form or do we have finches with specialized beaks, algae, killer whales and bighorn sheep. Living things evolve, adapt and fill in whatever space/niche they can. My feeling is that AI must do the same to make real progress. When it comes to 'higher order' human affairs that means practicing law, medicine, doing real estate transactions and so forth.

Ted Williams and Carl Crawford

From
http://sports.espn.go.com/boston/mlb/columns/story?columnist=edes_gordon&id=6366474

"In his first dozen games with the Boston Red Sox, Crawford has been paid more ($1.5 million) than Ted Williams is said to have been paid his entire career ($1.45 million, according to baseball-reference.com)."

Full article:
Friday, April 15, 2011
Updated: April 16, 3:01 AM ET
For Carl Crawford, now come the boos
By Gordon Edes
ESPNBoston.com

BOSTON -- He is not alone, of course. Not on a team that is 2-10, is collectively batting .224 and has five players in Friday night's starting lineup batting at the Mendoza Line (.200) or worse.
But Carl Crawford was the one advertised as the game-changer, the left fielder being paid on average more than any of his illustrious predecessors in Fenway Park, including Manny Ramirez. More? In his first dozen games with the Boston Red Sox, Crawford has been paid more ($1.5 million) than Ted Williams is said to have been paid his entire career ($1.45 million, according to baseball-reference.com).
So, Crawford is the biggest target and the player at whom Red Sox fans are now directing boos, a sound foreign to him during the nine seasons he spent with the Tampa Bay Rays.

Carl Crawford's .137 BA is not what fans were expecting. He has only seven hits in 51 at-bats.
"They have to boo," he said after Friday night's 7-6 loss to the Toronto Blue Jays, in which he went hitless in five at-bats, including a three-strike punchout in the ninth that ended with him swinging at a pitch that bounced in front of the plate.
"I'm playing real bad; we're playing real bad," Crawford said. "You definitely understand. You can't be upset about that. You kind of feel their frustration a little, but we're frustrated, too."
So far, Crawford's Red Sox experience has been The Nightmare on Lansdowne Street. He now is 51 at-bats into his Sox career and he has seven hits. One has gone for extra bases. The average is .137. He has scored three runs and knocked in one. He couldn't look more uncomfortable at the plate. The ump cost him an infield hit in his first at-bat Friday, but with Jacoby Ellsbury on third and one out in the seventh, Crawford managed just a shallow fly to left.
He also came up short on Travis Snider's game-tying double in the sixth, a ball that hit above him on the left-field scoreboard. He admitted afterward he might have been able to catch it.
At the plate, he is so at sea, he might as well be the USS Crawford.
Manager Terry Francona said he looked "a little bit jumpy," which is kinder than saying he looks painfully and totally out of sync.
"I thought he beat out that ball in the first inning," Francona said of Crawford's bid for an infield hit, which replays appeared to show he had won in a photo-finish race with pitcher Brett Cecil to the bag at first.
"I know he didn't hit it good," Francona continued, "but it's amazing how something like that [helps]. You go out to left field and you're 1-for-1 and you're feeling OK about yourself."
“
They have to boo. I'm playing real bad; we're playing real bad. You definitely understand. You can't be upset about that. You kind of feel their frustration a little, but we're frustrated, too.

” -- Red Sox left fielder Carl Crawford
Instead, it's impossible to imagine Crawford feeling anything but miserable. The Sox had essentially two days off, with a rainout Wednesday and a scheduled off day Thursday. Crawford was asked whether he thought about baseball during that time or tried to avoid thinking about it.
"You think about baseball a little bit," Crawford said. "You get your mind off it a little bit, try to relax as much as you can."
But at the plate, Crawford looks like he's mainlining Red Bull, swinging at pitches far out of the zone, fouling off pitches that he should be hitting off the wall, rolling over on way too many pitches and beating them into the ground.
"I'm still battling right now," he said. "Obviously I'm not getting the results I want, but I got to keep battling."
The Sox caught a break Friday night when umpires overruled a home run call on Adam Lind's first-inning drive that veered just right of the Pesky Pole and called it foul. Had the call stood, the Jays would have led 3-0. Instead, the Sox built a 3-0 lead on home runs by Dustin Pedroia and Kevin Youkilis, who has 15 walks but had not yet gone deep until he deposited one in the center-field camera well.
But Clay Buchholz walked five batters in just five-innings plus, and the Jays pulled off a hit-and-run and a double steal in a four-run seventh inning, the runs all coming at the expense of Bobby Jenks, who heard boos, too.

Prison Job Trumps Harvard Degree

Prison Job Trumps Harvard Degree

Published May 01, 2011 | The Wall Street Journal

Roughly 2,000 students have to decide by Sunday whether to accept a spot at Harvard. Here's some advice: Forget Harvard. If you want to earn big bucks and retire young, you're better off becoming a California prison guard.

The job might not sound glamorous, but a brochure from the California Department of Corrections and Rehabilitations boasts that it "has been called 'the greatest entry-level job in California' -- and for good reason. Our officers earn a great salary, and a retirement package you just can't find in private industry. We even pay you to attend our academy." That's right -- instead of paying more than $200,000 to attend Harvard, you could earn $3,050 a month at cadet academy.

It gets better.

Training only takes four months, and upon graduating you can look forward to a job with great health, dental and vision benefits and a starting base salary between $45,288 and $65,364. By comparison, Harvard grads can expect to earn $49,897 fresh out of college and $124,759 after 20 years.

As a California prison guard, you can make six figures in overtime and bonuses alone. While Harvard-educated lawyers and consultants often have to work long hours with little recompense besides Chinese take-out, prison guards receive time-and-a-half whenever they work more than 40 hours a week. One sergeant with a base salary of $81,683 collected $114,334 in overtime and $8,648 in bonuses last year, and he's not even the highest paid.

Sure, Harvard grads working in the private sector get bonuses, too, but only if they're good at what they do. Prison guards receive a $1,560 "fitness" bonus just for getting an annual check-up.

Most Harvard grads only get three weeks of vacation each year, even after working for 20 years -- and they're often too busy to take a long trip. Prison guards, on the other hand, get seven weeks of vacation, five of them paid. If they're too busy racking up overtime to use their vacation days, they can cash the days in when they retire. There's no cap on how many vacation days they can cash in! Eighty officers last year cashed in over $100,000 at retirement.

The cherry on top is the defined-benefit pension. Unlike most Harvard grads working in the private sector, prison guards don't have to delay retirement if their 401(k)s take a hit. Prison guards can retire at the age of 55 and earn 85% of their final year's salary for the rest of their lives. They also continue to receive medical benefits.

Read more: http://www.foxnews.com/opinion/2011/05/01/prison-job-trumps-harvard-degree/#ixzz1LAHqFtBI