Author Archives: ajsanna

Reflections on a Semester of Blogging

Before this semester, I had flirted with the Econ/Finance blogosphere in the past. Since my freshmen year I have subscribed to either the Wall Street Journal or the Financial Times, in order to learn about finance, economics, and general current events. My favorite blogs were the Financial Times’s FT Alphaville, which provided a look at many interesting topics in finance and NYT’s DealBook, which has a more specific investment banking focus (which is the industry I will be working in after graduation). Through my initial interest in these sites, I branched out to occasionally read economics blogs such as Greg Mankiw’s blog, Paul Krugman’s NYT column, or Marginal Revolution. Even while I was exposed somewhat to the finance/economics blogosphere prior to entering the class, a semester in Econ 411 gave me a greater understanding and appreciation for the communications medium of economic blogging.

From a reader’s perspective, it is clear that we are in a golden age of economic discourse thanks to blogging. Prominent economists, like Krugman and Mankiw can post lengthy analysis posts or quick rebuttals to posts by others. Economists from smaller schools like Scott Sumner from Bentley who writes The Money Illusion or Tyler Cowen of George Mason University at Marginal Revolution can develop big followings. Blogging provides a great medium for economists of all schools of thought to provide analysis and commentary on modern economic ideas and argue their points against another. It is less formal and work intensive than writing economic papers, and is capable of reaching a wider, less academic audience. The financial crisis left many average, college educated Americans wondering about how macroeconomics worked and in search of answers – the economics blogosphere seems to have risen to meet this demand.

From a writers perspective, I found blogging to be rewarding, although at times very challenging and laborious. The class requirement to write three posts a week proved to be relatively time consuming. At times, I was willing to sacrifice the quality of my post in order to get one done on time. I personally think the blogging component of the class would’ve been better if we had more time to do less blog posts. Perhaps a requirement of four posts a month would have been sufficient to allow us to write better long form posts that were heavier on analysis rather than quick news commentary. I did really enjoy following the news and other blogs closely. I discovered Aswath Damadoran’s Musings on Markets, a corporate finance blog, Professor Kimball’s Supply Side Economics blog, and Noah Smith’s Noahpinion blog, all of which I will certainly continue to follow. It has not always been easy, but the experience of learning to blog and voice an opinion on important economic matters is one that I will carry with me as I begin my professional career.

The Rise of the Boutique Investment Bank

In the modern world of Wall Street, there is a clear distinction between what are known as “bulge bracket” investment banks and boutique banks. The former include the largest multi-national banks including Goldman Sachs, J.P. Morgan, Morgan Stanley, Barclays, Citigroup, Bank of American, Deustche Bank, and Credit Suisse. Prior to the financial crisis in 2008, Lehman Brothers (acquired by Barclays) and Bear Stearns (acquired by J.P. Morgan) would have been considered part of the bulge brackets as well. These banks have the biggest balance sheets and provide the most products and services, which has led to them being labelled as “too big to fail,” in the wake of the financial crisis.

On the other end of the spectrum, you have what are referred to as boutique banks. These firms usually focus on providing mergers and acquisition advisory services only and usually do not have enough capital to provide significant debt or equity underwriting for corporate clients. Since the financial crisis, boutique banks have been on the rise – according to the New York Times DealBook, 30% of advisory fees went to smaller firms in 2013. This week marked an important milestone for the boutique investment banking industry as one of the most prominent firms – Moelis and Company, completed an initial public offering. As the Wall Street Journal reports, Moelis and Co’s IPO wasn’t the success some hoped but like it or not, boutique banks are here to stay and are an important part of the post-crisis investment banking ecosystem.

For the past two years, I have been involved in some form with investment banking recruiting at the Ross School of Business – last year as a recruit myself and this year as a peer career coach. I have had the opportunity to work both at a boutique bank and a bulge bracket and can say that from a work perspective, they are quite different. At the bulge bracket, we had access to every resource we could want but in turn, there was much more bureaucracy and hierarchical concerns to deal with. At the boutique bank, I felt that there was a far greater sense of independence, almost in an entrepreneurial sense. Everyone felt a close sense of ownership over their deal at the boutique, from the partner down to the analyst, where at a bulge bracket the deal was the firm’s. Neither of these approaches is right or wrong, but from my perspective, I enjoyed the boutique bank more.

At the end of the day, boutiques and bulge brackets can provide very similar advisory services, so it can be difficult for a company to choose who to hire. The keys to choosing an investment banker, in my opinion, should be (1) experience (2) name-brand (3) financing. In terms of experience, some firms are better in certain industries or understand certain types of deals better than others, which makes them better for a particular deal. My firm, for example, specializes in tech, media and telecom – outside of those industries, I wouldn’t necessarily recommend our services. Name brand also plays an important role in advisor selection. Goldman, for example, gives an air of credibility to a deal, as they are traditionally a leader in M&A advisory, but many boutiques have built this level of credibility as well. A reputable bank can help win support from shareholders or other counter parties. Lastly, companies must consider their financing needs. As mentioned above, a boutique cannot provide debt or equity financing for most deals and in order to get that secured from a bulge bracket, companies must usually hire them as an advisor as well. This means there will always be a place for bulge brackets in M&A advisory. Boutiques, however, present a compelling, independent alternative in the right situation and I would recommend them to most corporate clients looking for an investment banking advisor.

Rising Prices that Hit Home

Learning about inflation in Econ 411 and other classes, we economics students are familiar with the slow creep up in prices over time. At the current target rate of 2%, however, it is hard to notice inflation on a day-to-day basis. One must look at a long time period to see the true impact. Prices, however, can be sticky as firms raise their prices in larger increments over longer periods of time. As a piece in today’s Business Insider points out, two notable American consumer oriented businesses are planning notable price hikes within the next quarter – Chipotle and Netflix. Business Insider laments the negative effect this could have on American consumers who have faced higher than natural unemployment and stagnant wages but I believe that the two companies are right in increasing their prices.

Let’s start with Chipotle. Founded in 1993, the company has grown to over 1,500 locations and revenues of over $3 billion annually. From my experience, Chipotle is an incredibly popular fast dining option for most people I know from college students to families. It is also one of the most affordable. A full feature burrito or burrito bowl without guacamole or other extras currently costs less than $7. I have always viewed Chipotle as a high quality, value option when selecting a lunch or dinner spot. The news, therefore, that they are raising prices, did not really surprise me as I always believed this would be a possibility. The food items that go into burritos are commodities and Chipotle does not have much control over the cost of its food inputs. According to the company’s first quarter earnings release:

Food costs were 34.5% of revenue, an increase of 150 basis points driven by higher commodity costs. Higher commodity costs were primarily driven by inflationary pressures in beef, avocados, and cheese prices.

According to BusinessWeek steak prices have increased by 25% already this year while cheese and pork could rise by as much as 10% as well. It is fair for any company to pass on price increases to consumers, especially one that has maintained a steady price level for years like Chipotle. As with any item, the concept of price elasticity tells us that a price increase will likely lead some consumers to not buy the good, but considering that Chipotle is only planning an approximate 5% price hike, the increase should not deter too many hungry customers from buying burritos.

Netflix’s price hike brings up a similar point. Since they introduced their online streaming service in 2008, Netflix’s streaming subscriber count has passed 33 million in the US alone. And since they split their DVD mail order business from the streaming business in 2011, the price of a streaming subscription has remained $7.99 a month. As the company has accumulated more and more digital content – from AMC hits Breaking Bad and Mad Men to original content blockbusters like House of Cards and Orange is the New Black – the price of acquiring premium content has gone up. In order to continue to accumulate a world class content catalog, it makes sense for Netflix to increase the monthly subscription price by a dollar or two.

While Business Insider brings up a great point about the negative impact this could have on the American consumer, the danger is overblown. These are very small increases in services that were priced very reasonably to begin with. It will be interesting to see what impact this has on the number of customers at these two companies, but I can say that I will remain a loyal customer at both.

Lessons from Economics at U of M

Last week, a 2007 Berkley graduation speech by Nobel prize winner Thomas Sargent made the rounds on the blogosphere. Ezra Klein at Vox was one of the first to share. Dr. Sargent’s concise speech – it was less than 300 words – summarized what he felt are some of the most important lessons economics teaches. While there has been some criticism from commentators like Paul Krugman and Noah Smith, I wanted to look at Dr. Sargent’s lessons and see how they aligned with the lessons I am taking away after receiving Economics and Business degrees from the University of Michigan.

Dr. Sargets first two points, from my perspective, are some of some of the most important basic lessons in economics:

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

These are lessons learned in Economics 101 and 102. I remember the first week of Economics 101 with Professor Malone, we learned the concept of opportunity cost. In a world of limited resources, like the one we live in, there are trade offs and desirable outcomes that are just not feasible. These lessons were hammered home in 102, and taken as a basic assumption in upper level courses, but learning them was an important point in my economics education.

The next point that I feel my Michigan Economics education hammered home was:

5. There are tradeoffs between equality and efficiency.

My favorite economics class taken at the University was Econ 482 – Government Revenues with Professor Jim Hines. The class was almost entirely about the economics of taxation, and Professor Hines was a passionate and incredibly knowledgeable instructor in the subject. This class, more than any other, gave me an understanding of the difficult trade off policy makers face when designing a tax system. On the one hand, taxes are distortionary and cause deadweight loss, so in order to minimize the cost to society of taxation, policy makers should look for the most efficient forms of tax. The trade off here is that the most efficient forms of tax – like a propery tax, or a tax on a life saving drug – also typically are the most regressive and have the worst equality properties. Other classes, such as Government Regulation have dealt with this issue as well.

The last of Dr. Sargent’s points that I want to discuss is:

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

As a business student with an interest in finance and a future investment banker, this point is especially important. In Finance 300 and this class – Econ 411 – we learned about the Efficient Markets Hypothesis. Beating the market is incredibly difficult to do, as discussed in a Random Walk Down Wall Street, because in financial markets information is disseminated immediately and reflected in the price of an asset. In order for a trader or an investor to have abnormal returns, they must rely on analysis that no one else is doing or have information others do not have. Insider trading is illegal and independent analysis can be right or wrong, so beating the market is incredibly difficult to do, even though countless friends and colleagues will attempt to do so for the rest of their careers.

Overall, it is not a perfect list, but some of Dr. Sargent’s points really hit home for me as I near the end of my economics and business education. I hope to keep these points in mind as I begin my professional career and realize the true value of an economics degree.

 

Cap Rates: Market Multiples for Real Estate

In the world of corporate finance and valuation multiples are a familiar concept. As I have discussed in several past posts, multiples give an idea of relative valuation or what others are willing to pay for an asset. Over the weekend, I was home visiting my family and was discussing corporate finance concepts with my father, who is does real estate valuation for a living and he explained to me a similar concept. In real estate, the analogous concept would be the capitalization rate, or cap rate for short. I thought it would be interesting to explore this concept further in a blog post for an asset class (real estate) that I am not as familiar with as equities.

By definition a Capitalization rate is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value. Essentially, the cap rate is the inverse of traditional corporate finance multiples where the price is the numerator and the earnings are the denominator, so it is expressed a percentage. They can also been seen as a quick approximation of a property’s yield. An investment property, i.e., one that generates rental income, is viewed in the context of its net income which is rental revenue less operating expenses.  This net operating income would be akin to an EBITDA in the corporate finance world. To derive the value of a commercial property, its net operating income is divided by a market cap rate, or a rate of return prevalent in the market, to arrive at a value one might pay for the benefits (cash flow) of that particular asset.

One way to think about the cap rate intuitively is that it represents the percentage return an investor would receive on an all cash purchase.  For example, if a building is purchased for $1,000,000 sale price and it produces $100,000 in positive net operating income (the amount left over after fixed costs and variable costs is subtracted from gross lease income) during one year, then the indicated cap rate would be 10%:

$100,000 / $1,000,000 = 0.10 = 10%

Capitalization rates are an indirect measure of how fast an investment will pay for itself. In the example above, the purchased building will be fully capitalized – or pay for itself – after ten years (100% divided by 10%). If the capitalization rate were 5%, the payback period would be twenty years.

Another way cap rates can be helpful is when they form a trend.  If you’re looking at cap rate trends over the past few years in a particular sub-market then the trend can give you an indication of where that market is headed.  For instance, if cap rates are compressing that means values are being bid up and a market is heating up. According to the Wall Street Journal’s Property Pulse, cap rates for office buildings fell from 7.15% in 2012 to 6.93% in 2013. Cap rates are market based and fluctuate with the ups and downs of the commercial real estate markets.  Although they have some similarity to multiples in the corporate valuation sense, cap rates represent a very different asset class – commercial real estate – and are driven by very different factors over time. Overall, they are a useful tool to understand for anyone planning to invest in real estate.

T-Mobile Provides a Compelling Investment Opportunity

I have written at length about my research regarding government regulation in the wireless telecommunications industry, which I had to conduct for Econ 432. As I studied the regulatory and antitrust issues facing this industry, I because interested in it from an investment stand point as well. Last month, I pitched an investment in T-Mobile (NYSE:TMUS) to an investment club that I am a member in called Michigan Interactive Investments and the club invested in the company following the pitch. Our thesis was that T-Mobile survived an attempted takeover by AT&T in 2011 thanks to an antitrust intervention and since then has come a long way in terms of boosting its network quality and brand reputation. As the primary disruptive force, in a relatively uncompetitive industry, I believe T-Mobile has the capability to disrupt the established business model and steal significant share from its competitors, which is why I recommend investing in it now.

From an industry perspective, wireless telecommunications seems to be a very attractive industry. According to IBIS World Reports, the industry is expected to grow at 6.6% percent over the next five years, outpacing GDP growth. The driver for this growth is not necessarily adding new subscribers, but rather selling existing subscribers more data. Individuals are purchasing more devices that need wireless connections, such as tablets so data needs will continue to rise for some time to come, which will benefit the entire industry.

The necessary requirement in order to sell more data to consumers, however, is a good network. A good network requires heavy investment in infrastructure and spectrum licenses. This mean that barriers to entry are very high, which should protect incumbents like T-Mobile. One question is, though, how does T-Mobile’s network stack up against competitors? According to CNET, T-Mobile CEO John Legere has claimed that the company now has the fastest 4G LTE speeds in some markets, as shown by average speeds on Speedtest.net, a long way from not having LTE at all three years ago. It is true that they are the smallest of the Big 4 wireless companies, but they have made great strides in improving their network. Now that they have a network that they are closer to their rivals in terms of quality, T-Mobile is free to compete on other points like price and contract flexibility in order to win customers.

I also believe now is a great time to invest in T-Mobile because there is a very low-key catalyst that could boost the stock significantly – the 2015 600 MHz spectrum auction. According to the Wall Street Journal, the FCC is planning to auction a significant chunk of spectrum in the 600 MHz range, which has some of the best properties of any spectrum ever auctioned, making it incredibly valuable. All spectrum below 1 GHz is considered low frequency and has excellent propagation and range properties, which make them very valuable to wireless broadband providers. T-Mobile is the only wireless company without significant low frequency holdings as shown below as the WSJ explains.

The key to the 2015 auction is that the FCC is considering imposing caps that limit how much the Big 2 – AT&T and Verizon – can acquire of the low frequency spectrum. This could be a big win for T-Mobile, which would have a clear path at acquiring the spectrum it needs to further improve its network and compete at a higher level with the Big 2.

Because the market may not be fully buying into T-Mobile’s turn around, or may not be fully pricing in the possibility of the company winning low frequency spectrum, I believe the stock may be underpriced at the current level and now is a great time to invest in a company that is one the rise.

 

(REVISED) Tesla: Another Castle in the Sky Valuation Case Study

In light of my recent post about Facebook’s valuation of WhatsApp, I wanted to explore another relevant case study in valuation: Tesla Motors. Tesla has gained notoriety as an electric car manufacturer in the US. Founded by the eccentric entrepreneur Elon Musk (who formerly founded PayPal), the company has developed several models of fully electric vehicle that some observers believe will transform the automotive industry. Last month, Morgan Stanley released what the WSJ called an “ambitious” research note that sent the stock surging. As the article goes on to describe:

How ambitious? Put it this way: when a research report from Morgan Stanley uses the word “utopian” 11 times — each of them in a sincere, non-ironic way — when describing the future of your company, it’s an ambitious endorsement.

The Morgan Stanley research note points towards a “utopian” society in which fully automated automobiles completely dominant the market and Tesla is at the forefront. They illustrate their potential vision in the graph below:

BN-BR447_Utopia_G_20140225160506

It is hard not to be skeptical about any valuation that relies on visions of utopia to justify its claim. As Malkiel describes in A Random Walk Down Wall Street, sell side research analysts in particular, are prone to conflicts of interest. Tesla would be a coveted investment banking client for a firm like Morgan Stanley and since the automakers stock is all the buzz right now, the bank may want to cash in a PR boost by making an aggressive prediction.

The point remains, however, that the stock is trading near all time highs. The company is worth almost $30 billion dollars, which makes it more valuable than some long standing conventional automakers such as Renault, the French auto company. I consider myself a firm foundations theory believer, so I decided to do some quick off-the-cuff calculations to see what metrics would make Tesla’s current valuation reasonable.

For starters, I looked at Tesla financial statements to determine the market capitalization and added the firm’s debt, which gave an enterprise value or a total value of the firm of about $27.5 billion. Then I assumed a (very rough) cost of capital for the firm of 15%, which is based on the fact that the firm is capitalized primarily with equity a more expensive form of capital than debt. Based on this discount rate, the steady state earnings that Tesla must generate to be worth $27.5 billion are around $4.2 billion annually. Next, I looked at traditional margins for the automotive industry – Ford and GM hover around 3-3.5% operating margins over recent years, however, I factored in that Tesla may be able to sustain higher margins because they sell a more premium product and maybe be able to produce more cheaply once they attain sufficient scale. Let’s say they can sustain a 5% operating margin in the long run then. Based on this assumption, their annual revenue must be around $83 billion. Compare this now to total annual US auto sales, which I found through IBIS World report. The annual US auto market is around $102 billion, so at Tesla’s current valuation, its steady state revenue would be approximately 80% of the current market!

As I discussed in my WhatsApp post, fundamental analysis may not be very useful if you are a trader in this company. As Keynes said, “the market can stay irrational longer than you can stay solvent.” I will not deny that the growth prospects for Tesla appear bright and there is always the potential that the company will truly prove revolutionary enough to justify its valuation over the long run. For now though, as a firm foundation believer, I would stay away from an investment in Tesla Motors.

EDIT: When I published this post on March 26, Tesla was trading at $218 per share. Since then, the stock has traded down considerably, falling below $200 for over a week and just recently crossing back above that level. The market seems to share many of the concerns that I mentioned above. There has also been pressure on the direct sales model that Tesla employs to sell its car, with a high profile legal move by the state of New Jersey, which prohibits direct auto sales. Tesla has the potential to become the next great American auto maker but still has many significant obstacles to overcome, which is why I would continue to recommend any investment in the upstart company.

REVISED: The Value in College

As I near the end of my time as a student here at the University of Michigan, it seems a useful time to reflect on the value of how I spent my last four years (and the tuition money to attend). Higher education, as with any other activity, is a trade off. These past four years I could have been working full time in a job that did not require a college education, which according to a report from the College Board, would earn me about $33,800 annually. According to the same report, earning a college degree typically boosts an individuals earnings by an average of $22,000 to an annual income of $55,700. Taken into account over an entire lifetime, this figure alone seems to justify the time and monetary cost of a college education.

This week the Economist also explored the issue of higher education value in their article “Is College Worth It?” The Economist article brought up two important points in my opinion – the value of a college education depends both on where you go to college and what you study when you are there.

As to the first point – where you go to college matters – the Economist broke down the value of an education from different institutions based on the return on investment that going to that school generated. They used data from an independent research firm PayScale to come up with the ROI figures over the first 20 years out of school. The highest ROI schools included University of Virginia (17.6%), Georgia Tech (17.1%), and Harvard (15.1%). While some of the nations top schools command strong double digit ROIs, there is a steep drop off in quality at a certain point – the Economist highlighted several school with low single digit or negative ROIs. At that point you would be better off taking the money you would’ve spent on college and investing in Treasuries.

So how does the University of Michigan stack up from an ROI perspective? For in-staters (which I am), the annual ROI is 8.1% according to PayScale. This obviously beats most alternatives like investing in Treasuries but also brings up an interesting point – what about the intangible elements of receiving a college education from a world class institution like U of M? I think there are three things to consider here:

  1. Networking. At an institution like the University of Michigan, some of the value is derived from the networking possibilities. An aspiring professional in almost any field values a network of similar minded people and developing that network takes time and energy. Attending a university can give an individual easy access to a strong network of like minded individuals bound by a similar allegiance to their alma matter, which carries intangible value throughout their career.
  2. Marriage Market. Last year, Princeton alum Susan Patton caused a stir when she sent the Daily Princetonian a letter titled “Advice for the young women of Princeton” encouraging women to look at college as prime husband hunting territory. While her remarks were controversial, Ms. Patton hit on an interesting point – top colleges serve as very liquid marriage markets. This is a point that Professor Kimball first brought up in class and it piqued my interest. Many people form relationships with people that attended the same college as them that ultimately end in marriage. Marriage continues to be a social institution that adds value and stability to our society. Fostering an environment that allows individuals to find suitable life partners is a great element of higher education and no doubt provides additional intangible value beyond the simple ROI calculations.
  3. Happiness. Our society places a strong emphasis on higher education, especially at elite, highly selective institutions like U of M. The utility that one derives from a college education is about more than the future monetary reward, unlike what PayScale might have you believe. People feel a sense of community and attachment around their alma matter. At a school like the University of Michigan, we have nationally competitive sports programs to root for, that add extra utility to our lives. And having the opportunity to spend four years in a vibrant and exciting college town like Ann Arbor, certainly confers a great deal of utility in our lives.

Overall, boiling down college to an ROI number is a helpful decision making tool for prospective students and highlights the concerns that parents and future students should have when selecting a school and major. I believe, however, that there is much more that goes into the value of a college degree and students should consider those factors as well when making higher education decisions.

 

Optimal Wireless Telecom Regulation

In a previous post, I discussed my semester long research project for another class, Econ 432: Government Regulation taught by Professor Jim Adams. My research has focused around the wireless telecommunications industry in the United States, which I believe is a vitally important industry in our modern information age. There are two main regulatory concerns, which I addressed in my research (and in my previous post). Because this industry has very high seller concentration, anti-trust regulation is very important as evidenced by the DOJ’s blocking of AT&T’s attempted acquisition of T-Mobile in 2011. The other important regulatory concern is spectrum allocation. Spectrum is required to operate a mobile network and there is a fixed supply, so the FCC uses auctions to efficiently allocate the licenses. These two regulatory issues have shaped the modern wireless telecom industry and made it what it is today – a four firm oligopoly market, where consumers are constantly frustrated with the service and prices offered. So how can the government fix this industry, which is plagued with anti-competitive practices? I offer three recommendations that the government should implement in order to save US wireless going forward:

  1. Publicly commit to a four firm market structure. After a wave of consolidation in the 2000s, the wireless market came to be dominated by four firms. AT&T, which had combined in Cingular, and Verizon dominate the market, controlling nearly two third of the market combined. Their smaller rivals consist of Sprint, which acquired Nextel, and T-Mobile comprise the rest of the market. So now we are left with four national firms, which doesn’t exactly call to mind a highly competitive market. However, it is important to consider that the fixed costs of running a mobile network are very high, which makes some degree of natural monopoly inevitable. During the 2011 anti-trust suit against AT&T/T-Mobile the DOJ expressed desire to maintain a four firm market structure. Now there are rumors that Sprint and T-Mobile want to combine to better compete with the big two. The FCC, however, should preempt this move and publicly announce that it is committed to maintain the four firm market structure as it is the best way to ensure competition among the remaining national carriers.
  2. Put mechanisms in place to ensure equitable distribution of spectrum among the carriers. The beauty of auctioning spectrum, is that it is typically highly efficient – the firm that values it the most is willing to pay the most. It is just good economics. The problem arises, however, as market power is established among the incumbent firms. AT&T and Verizon are willing to pay more than their instrinsic value in order to keep the spectrum from Sprint and T-Mobile, and they have the financial firepower to do so. The FCC can put mechanisms in place in spectrum auctions that penalize the incumbents or prevent them from hording spectrum in order to give T-Mobile and Sprint the chance to build sufficient spectrum holdings of their own.
  3. Encourage market entry and innovation by setting aside unlicensed spectrum blocks. The point of spectrum licensing is that it prevents signal interference, which would diminish our social utility derived from the spectrum. However, the current system creates enormous barrier to entry that stifle competition. The FCC could combat this by actively setting aside unlicensed blocks of spectrum that anyone is free to broadcast over. Technological advances have diminished the impact of interference for some applications and allowing a small “free market” experiment to take place in terms of wireless spectrum usage could allow for innovation and new entrants that will improve wireless technology and boost social welfare in the future.

 

 

The Value in College

As I near the end of my time as a student here at the University of Michigan, it seems a useful time to reflect on the value of how I spent my last four years (and the tuition money to attend). Higher education, as with any other activity, is a trade off. These past four years I could have been working full time in a job that did not require a college education, which according to a report from the College Board, would earn me about $33,800 annually. According to the same report, earning a college degree typically boosts an individuals earnings by an average of $22,000 to an annual income of $55,700. Taken into account over an entire lifetime, this figure alone seems to justify the time and monetary cost of a college education.

This week the Economist also explored the issue of higher education value in their article “Is College Worth It?” The Economist article brought up two important points in my opinion – the value of a college education depends both on where you go to college and what you study when you are there.

As to the first point – where you go to college matters – the Economist broke down the value of an education from different institutions based on the return on investment that going to that school generated. They used data from an independent research firm PayScale to come up with the ROI figures over the first 20 years out of school. The highest ROI schools included University of Virginia (17.6%), Georgia Tech (17.1%), and Harvard (15.1%). While some of the nations top schools command strong double digit ROIs, there is a steep drop off in quality at a certain point – the Economist highlighted several school with low single digit or negative ROIs. At that point you would be better off taking the money you would’ve spent on college and investing in Treasuries.

So how does the University of Michigan stack up from an ROI perspective? For in-staters (which I am), the annual ROI is 8.1% according to PayScale. This obviously beats investing in Treasuries but also brings up an interesting point – what about the intangible elements of receiving a college education from a world class institution like U of M? I think there are three things to consider here:

  1. At an institution like the University of Michigan, some of the value is derived from the networking possibilities. An aspiring professional in almost any field values a network of similar minded people and developing that network takes time and energy. Attending a university can give an individual easy access to a strong network of like minded individuals bound by a similar allegiance to their alma matter, which carries intangible value throughout their career.
  2. Colleges like University of Michigan serve as very liquid marriage markets. This is a point that Professor Kimball first brought up in class and piqued my interest. Many people form relationships with people that attended the same college as them that ultimately end in marriage. Even as liberal ideas on relationships gain acceptance, one cannot argue that marriage is a social institution that adds value and stability to our society and fostering an environment that allows individuals to find suitable life partners is a great element of higher education.
  3. Happiness. Our society places a strong emphasis on higher education, especially at elite, highly selective institutions like U of M. The utility that one derives from a college education is about more than the future monetary reward, unlike what PayScale might have you believe. People feel a sense of community and attachment around their alma matter. At a school like the University of Michigan, we have nationally competitive sports programs to root for, that add extra utility to our lives. And having the opportunity to spend four years in a vibrant and exciting college town like Ann Arbor, certainly confers a great deal of utility in our lives.

Overall, boiling down college to an ROI number is a helpful decision making tool for prospective students and highlights the concerns that parents and future students should have when selecting a school and major. I believe, however, that there is much more that goes into the value of a college degree and students should consider those factors as well when making higher education decisions.