Will Today’s ‘Stupid’ Become Tomorrow’s ‘Smart’?

Back in November, both presidential candidates acknowledged that we had to reform our education system. Like most everything else, Obama and McCain naturally disagreed on how to solve this issue. Perhaps we need to pay teachers more and get the best-qualified educators to head our classrooms. Perhaps we need to have more vouchers and charter schools to foster competition. Perhaps we just need parents to get more involved in building shoebox dioramas and helping their kids with algebra problems.

Or, perhaps we’re just getting dumber. (After all, we elected George W. Bush twice. Enough said).

Now that Obama’s education team is in place, here is my billion-dollar proposal: tell smart people to start making babies. Seriously. Set up some mood music in grad school dorms, dim the lighting in the labs, and arrange for some conjugal visits at the space station. Let’s do everything we can to encourage reading and breeding amongst the nation’s intellectual elite.

Why? Consider this: over the past few decades, we have seen significant declines in the birth rates across the country. As more and more young people started going to college, and women became more prevalent in the workplace, births in the U.S. have naturally declined. With that, the composition of mothers has also changed:

“Fertility tends to decline as education level increases. Women may put off marriage and children to further their education, then to get established in the labor force. Women age 40 to 44 with no high school education had about 2.5 children in 2004, compared with 1.6 children among women with a graduate or professional degree.” – Mary Kent, Population Reference Bureau

So keeping this in mind, let’s look at the following charts from the National Center for Health Statistics, which show the birth rates by state in 2002.

In this graphic, the blue states are the most fertile, while the green states are the most sterile (somewhat ironic).  We can see that the states with the highest birth rates are typically in the Midwest and South, whereas East Coasters and Californians are apparently too busy to procreate.  The state with the highest birth rate was Utah (20.9 for every 1,000 people), which may not be all that surprising. (Go to full report)

Now here is a graph from a U.S. Census report, on the percentage of college graduates by state:

So it looks like the states with the most college grads are also the states which tend to have the lowest birth rates.

Hmm…

Consider if this trend continues: the least-educated areas of the country are popping out babies like hotcakes, while the sterile Ivy Leaguers in the Northeast are busy trading mortgage-backed securities on Wall Street. Thus, the composition of the American population is skewed towards those with parents who are less educated. One may argue about the degree to which parents’ educational attainment affects their children’s test scores, but there is undoubtedly a correlation between the two. And while Texans and Idahoans may rightly argue that causality cannot be determined by a few colorful graphs, the data is in line with what we know: women who attain less education have more babies. There is a greater likelihood then that their kids will get less education than children born to snooty PhD candidates in Washington. And their kids will have more kids and more kids, while the slice of snooty intellectuals gets smaller and smaller.

So what can turn this around? In the end, we need to build a universal culture that values learning, instead of a dumb-is-cool culture that values a self-righteous idiocracy. We need to get students excited about education, and close the achievement gap that too often divides along racial and socioeconomic lines. We may need to rehaul our schools, implement student incentive programs, or pay our teachers more…

And we could also start encouraging smart people to make some babies, too.

Pretty Soon, Today’s ‘Stupid’ Will Be Tomorrow’s ‘Smart’

Last week, both presidential candidates acknowledged that we had to reform our education system. Like most everything else, Obama and McCain naturally disagreed on how to solve this issue. Perhaps we need to pay teachers more and get the best-qualified educators to head our classrooms. Perhaps we need to have more vouchers/charter schools to foster competition. Maybe we just need parents to get more involved in building shoebox dioramas and helping their kids with algebra problems.

Or, perhaps we’re just getting dumber. (After all, we elected George W. Bush twice. Enough said).

Consider this theory: over the past few decades, we have seen significant declines in the birth rates across the country. As more and more young people started going to college, and women became more prevalent in the workplace, births in the U.S. have naturally declined:

“Fertility tends to decline as education level increases. Women may put off marriage and children to further their education, then to get established in the labor force. Women age 40 to 44 with no high school education had about 2.5 children in 2004, compared with 1.6 children among women with a graduate or professional degree.” – Mary Kent, Population Reference Bureau

So keeping this in mind, let’s look at the following charts from the National Center for Health Statistics, which show the birth rates by state in 1990. The chart on the top shows the birth rate, while the chart on the bottom shows the growth in births from 1990 to 2002. The state with the highest birth rate was Utah (20.9 for every 1,000 people), far surpassing Texas as the place where the most babies are made (or at least birthed). (Go to full report)

The states with the highest birth rates are typically in the Midwest and South, whereas East Coasters and Californians are apparently too busy to procreate. Unsurprisingly, these are the same areas where birth rates have declined the most in the past ten years, whereas states like Texas, Oklahoma, Utah, Georgia, and North Carolina have stepped up their baby-making game.

Now here is a graph from a U.S. Census report, on the percentage of college graduates by state:

So, the states with the most college grads are also the states which tend to have the lowest birth rates.

Hmm…

Consider if this trend continues: the least-educated areas of the country are popping out babies like hotcakes, while the sterile Ivy Leaguers in the Northeast are busy trading mortgage-backed securities on Wall Street. Thus, the composition of the American population is skewed towards those with parents who are less educated. One may argue about the degree to which parents’ educational attainment affects their children’s test scores, but there is undoubtedly a correlation between the two. And while Texans and Idahoans may rightly argue that causality cannot be determined by a few colorful graphs, the data is in line with what we know: women who attain less education have more babies. There is a greater likelihood then that their kids will get less education than children born to snooty PhD candidates in Washington. And their kids will have more kids and more kids, while the slice of snooty intellectuals gets smaller and smaller.

So what can turn this around? In the end, we need to build a universal culture that values learning, instead of a culture that values moose huntin’ and a self-righteous idiocracy. We need to get students excited about education, and close the achievement gap that too often divides along racial and socioeconomic lines. We may need to rehaul our schools, implement student incentive programs, or pay our teachers more…

And we could also start encouraging smart people to make some babies, too.

Lessons Learned from Buying Lehman at $61

In the past few days, another investment bank has fallen, another huge government bailout has been announced, and WaMu customers are making like it’s 1929 and rushing to take money out of their Whoo Hoo! checking accounts. Year to date, the S&P 500 has fallen by over 20%, unemployment is at a five-year high of 6.1%, and it doesn’t seem like the end is in sight.

So, how did this all happen? What has caused Morgan Stanley to court Wachovia, and WaMu to pimp itself out to the Koreans? We’ve heard the terms “housing bubble” and “subprime crisis” and “credit crunch” ad nauseum over the past few months… but what does it all mean? The following is my attempt to explain the recent travails of the economy, and why I probably never should have bought Lehman at $61:

A couple years ago, you bought a house and took out a $300,000 mortgage on it. The bank that issues this mortgage takes it and pools it along with other customers’ mortgages. Then they sell this product, called a mortgage-backed security, to Lehman Brothers. Lehman likes buying mortgage-backed securities, since it can get a decent return for a perceived low amount of risk, as historically, people rarely default on their mortgages. All the other big investment banks/brokerage houses are doing it too, and so there’s a strong secondary market out there for these securities. This is a seemingly win-win situation for all: a profitable venture for Lehman, and a way for the banks to lend more money and increase home ownership.

Enter subprime.

The banks and mortgage lenders are doing well; they can sell off their pooled mortgages to the traders at Lehman, or to Fannie Mae and Freddie Mac. Much of the risk that the customer will default, then, can be transferred. Thus, the mortgage lenders start getting more lax in their lending terms. More and more subprime mortgages are issued, which involves lending to high-risk borrowers like your deadbeat cousin Charlie. The lending terms are structured so that it looks good at the time of signing (encouraging more Charlies to borrow), but after a certain initial grace period, borrowers are hit with much higher rates.

Meanwhile, the MIT grads at Lehman are concocting new complex derivatives in order to make money. Remember that a mortgage-backed security is already a pool of mortgages. Now, the guys on the Street are trading pools of these pools. And pools of pools of pools. Your $300,000 mortgage is all part of this. Thankfully, you, as a credit-worthy, responsible citizen, have been diligently making payments. But Charlie, who is using his home as a laboratory for crystal meth, is not. Of course, mortgages had already been pooled to mitigate the risk of individual borrowers defaulting. BUT, if a whole bunch of people start using meth instead of paying off their mortgages, then we’re in trouble not just for that one security, but for all of its new derivatives as well.

Then, to make matters worse, the housing bubble bursts.

Prior to 2005, housing prices had been on the rise, with higher sales and consequently, more homes being built. At some point though, supply far exceeded demand, and housing prices began a steady decline. Let’s say the house you bought was worth $300,000 at the time of your purchase. Now, the price of your home is at $200,000, a decline of 33%, right around the rate that housing prices in Southern California have declined. Because the price of his house has fallen too, your cousin Charlie can no longer afford his monthly payments (which have also skyrocketed after his low-rate grace period expired). He, along with thousands of other subprime borrowers, defaults. His meth lab goes into foreclosure. You’re still scraping by, but your monthly payments are going up because the price of your home has dropped so dramatically.

While all this is happening, Lehman and other banks with large portfolios of mortgage-backed securities are taking the losses incurred from all the Charlies defaulting. They also face the suddenly very real risk that you may default too. Already saddled with these losses, the prices of all mortgage-backed securities (and its derivatives) drop across the board. No one wants to buy, and so the value of these assets just continue to plummet. Firms are forced to issue billions of dollars in write-offs. Lehman’s stock price falls and it tries to raise capital–not only because it needs more cash as collateral for its lenders (like your mortgage payments going up when your house price falls), but also to assuage outside perception that it’s going under. But there aren’t too many institutions out there that are in a position to lend money, and not many that want to do it–especially to a firm whose net worth is unknown because of all its mortgage exposure. Banks everywhere enact tougher lending standards to individuals and businesses, making it universally difficult to get cash… thus leading to a “credit crunch”.

So in the end, with a portfolio full of assets that have no market, hedge funds aggressively shorting its stock, and no one willing to lend it money, Lehman files for bankruptcy. Charlie is living on the streets, you’re struggling to pay your mortgage, and more turmoil (involving more derivatives, including AIG’s credit default swaps) is roiling the market… Not a very happy ending.

Obviously this is a simplified version of what happened in the overall economy; in reality, the chronology of what happened is not as linear, and the situation at Lehman was far more complicated than anything I could explain. Many of our venerable publications will do a far better job of sorting through the mess than I have, but hopefully this can serve as a primer. After all, this story is probably not over yet.