Investments in Education as a Stimulus for Long-Term Economic Growth and Development

February 25, 2010 Edition, Volume IV

Inside Signature Update

- The Market – Pay Attention to Earnings
- The Economy – Investments in Education Stimulate Growth
- The Takeaway – Obama’s Surprising Support of Annuities


THE MARKET – Pay Attention to Earnings

For those who paid attention to Thursday’s equities market it was a wild ride and a tough day. The DOW opened sharply lower, down almost 190 points within the first hour of trading, before climbing back to close at 10,321, or down only 53 points. The combination of a weak employment report and an eleven point decline in consumer confidence was enough to send Bears to the forefront and reign in even the strongest of Bulls.

Here’s the irony: with most publically held corporations having reported 4th quarter and full year 2009 earnings, some 80% of them were not only profitable, but exceeded expectations. This supports current price levels and opens the door for higher stock prices in the future as 2010 earnings estimates suggest equity values 15-20% higher.

The S&P 500 aggregated forward earnings estimates of roughly $90 and a PE multiple (price/earnings) of 15 would suggest an S&P market valuation by year end 2010 of 1350 versus today’s closing value of 1,103. That represents an increase of 22.4%, in line with our 2010 expectations.


THE ECONOMY - Investments in Education Stimulate Growth

As many in our economy search for new standards against which we can measure future performance, we begin to look for ways to improve our current condition. Just as we discussed in the March 29, 2009 edition of Signature Update, When Markets Reset, our economy has a different look and feel today than it has in decades past, and the change will be reflected in long-term consumption and investment patterns. We also have an opportunity to impact the future of our nation as a leader in global economic and political policy and power; indeed, this is exactly why many voted for the sitting U.S. President, believing or “hoping” Mr. Obama to be a transformative leader. Whether he is or isn’t remains to be seen, but what is certain is that his political power alone can’t alter the trajectory of the nation. For that to happen, our state and national leaders will need to do what is seemingly most difficult for them; to put aside party differences, expect sacrifices to be made and to ask for more cooperation from businesses and households than at any time since WWII.

Over the past forty years, our economy has shifted from one strong on engineering and manufacturing to one lead by the financial markets. Much of our manufacturing capacity, and the jobs that went along with it, has been exported to the lower cost environments of developing countries. The expectation was that we would replace these jobs with higher paying opportunities in technology, medical sciences, and finance, and indeed we have, but we’ve also experienced an unforeseen trend which has begun to shift our economy and widen the income gap separating our households.

At the same time that foreign workers have benefited by fulfilling US manufacturing demand by offering lower labor costs, too many US workers have chosen to limit their educational opportunities, have unrealistic lifestyle expectations, and are only prepared to work at low paying jobs. The developing economies in which manufacturing has blossomed will one day demand labor prices at levels that will make it affordable to bring the jobs back to the US market, but we may not have a domestic labor force prepared to perform the necessary work when the time comes, and we risk the possibility that US manufacturing may never recover.

In addition to adding millions of higher paying jobs, we’ve also created a disproportionately large number of low paying jobs in food services, convenience, retail, and leisure. Some suggest these are the product of higher levels of discretionary income in households benefited by better paying employment and the increase in the incidence of two-income households. Others recognize it as being driven by a growing class of workers unprepared to make meaningful contributions to technology and industry and only able to fill less challenging positions.

During the very period of time in which we might have become better able to dominate the world’s technological, scientific and social innovations we’ve become less relevant when compared to other developed nations. In the name of social progress, we’ve been disadvantaged by too many policies and influences designed for social and financial redistribution and equalization. The unfortunate byproduct of these efforts has been to decrease the average level of preparation of our workers. Though we’ve continued to innovate and drive much of the progress evidenced in the global technology, scientific and manufacturing markets, we’ve fallen behind without most of our citizens understanding why. Sadly, we’ve recently come to realize that we’ve also caused some of the difficulties in the global financial markets.

We can change the negative trend, improve the lives of our citizenry, and stimulate long-term growth and economic development, but it’s going to take effort, inconvenience and enormous political and investment capital to do so. President Clinton often spoke of “investments” while working to gain public acceptance for tax increases. Similarly, the Obama administration has used some of the same language to gain popular support for stimulus proposals. In each case we can argue that high percentages of the funds disbursed following these efforts have been directed towards transfer payments and social programs. At the same time, meaningful amounts have also gone into job-creating infrastructure development and some has actually made its way into “investment”, or been used not just to create short-term jobs or support those dependant on social programs, but has been employed in such a way as to create surplus through production and innovation.

Most don’t look at funds directed toward education in this light, but when applied in such a way as to foster higher levels of competency and to raise educational standards, this sort of spending is “investment” of the most important kind. In 1981 Professor Richard A. Easterlin of USC published an article titled Why Isn’t The Whole World Developed?, in which he drew on research spanning centuries and continents. The data supported Easterlin’s hypothesis that economic development follows educational improvement. Those societies that supported mass education in the early 19th centuries became economic leaders of the 20th century (Germany, France, Great Britain, United States, etc.), while those that adopted broader educational initiatives later in their histories also experienced economic growth and development later (Romania, Yugoslavia, Russia, India, Brazil, China, Mexico, Philippines, Argentina, etc.). Those that continued to resist making educational investments remain among the poorest nations on earth, with unacceptably low standards of living (Nigeria, Ethiopia, Burma, North Korea, Haiti, etc.).

Similar comparisons and conclusions are now being drawn by economic researchers regarding state-to-state differences in educational investment and economic growth and development within the US. The research unequivocally shows that those regions that commit to higher levels of educational investment gain long-term economic advantages in engineering, technology and medical and environmental sciences over those that don’t. If we want to improve the future of our regional and national economy it is incumbent on legislators to increase funding, policy makers to expect more from educators, teachers to require more from students, and parents and their children to discipline themselves and take advantage of their opportunities rather than squander them, as do so many.

Now I’m biased in this regard. My wife and I both enjoy the benefits of having graduated from a major university and I’ve gone on to participate in graduate programs at yet others. My children have followed suit and are participants in higher education at varying levels. They haven’t been perfect students, but they’ve been active participants. They’ve worked hard, studied long, put up with a level of involvement and expectation from their parents that they certainly didn’t appreciate at the time; they’ve offered respect to their instructors, completed assignments, and prospered as a result. It wasn’t easy and it certainly hasn’t been without sacrifice or expensive, but it’s been among the most important things we ever have, or will do.

Our schools should be palaces of learning, our teachers among the best paid in our society, our expectations should be high and our outcomes extraordinary. But they aren’t, and until we deal with the reasons why, we’re not likely to gain the advantages we so desperately need. Likewise, an excellent college education should be free for all those willing to take advantage of it; those willing to perform and commit to using their education to return value back to our society.

This is a difficult time to discuss increasing investment in education. State budgets are under extraordinary pressure due to the recession and legislators are struggling to maintain basic services and commitments. But it’s more than that; legislators, tax payers, involved parents and many excellent educators are tired of the disappointment that often comes through compromise, through pressure to put up with unacceptable student behaviors, and requirements imposed that end up diluting the value and values of our educational system.

Our schools, teachers, children and futures deserve to be subject to higher expectations and must be allowed to benefit through innovation. One such educational advancement has come through the many charter schools emerging across the country. As a whole, they educate to a higher standard and at a lower cost. They prepare students such that years are able to be shaved off the time needed to gain a similar education in more traditional settings.

My youngest child has attended her junior and senior years of high school in a charter school setting. She enrolled in a school literally embedded in the local community college and completed her freshman and sophomore years of college concurrent with her last two years of high school. The requirement to participate in this charter school is committing to the curriculum and accepting that the school offers less in the way of sports, social activities and liberal arts programs; rather than being required to meet a high GPA level or bear an increased cost. After all, charter schools are public schools. The additional cost to our family over the cost of those years at the local high school was simply the added cost of transportation to a school 10 miles away; which we more than made up for in decreased costs of unnecessary programs and activities.

While most states struggle to support the net cost of higher education (tuition income and grants less total expenses) our daughter’s charter school produces high school graduates at a lower cost than does the local high school and eliminates the need for two entire years of post secondary education – as well as the added cost burden of those years.

Often times teacher’s unions and social advocacy groups discourage this type of innovation in an effort to protect their power and influence. In the end, it is short-sighted and has lead to higher costs and lower output.

The state and local leaders willing to increase funding for education, increase expectations for teachers and students and open the way for technological and economic development will find themselves benefiting from long-term growth and development and have a decided competitive advantage over those that don’t. Likewise, the added benefit to the nation is enough to expect increased federal funding for buildings, classrooms, teachers and programs sufficient to offset that which the states can’t reasonably provide on their own.

This is a time for state and national legislators to become courageous and adopt an expanded vision of what can and ought to be, but it will only work if performance standards are rigorously maintained at every level, including that of the student.


THE TAKEAWAY – Obama’s Surprising Support of Annuities

- Current market volatility may remain higher than normal as unemployment concerns persist and the national and global political climate retakes center stage over earnings reports.

- Bond values, little changed since last week’s announcement by the Fed, are likely to weaken through the year as we get closer to inevitable increases in interest rates.

- President Obama’s surprising support of annuities as value added investments in qualified retirement plans will put a spotlight on these insurance based instruments and may make those that are too complex or very costly easier to understand and more competitive.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC