Population Series: Lower Population Growth Requires More Innovation for Societal Advancement
Fluctuations in population necessitate innovation
We continue to think that population dynamics are the most important economic variable in local, national, and global economics. In this essay we depict an especially challenging future for “degree granting postsecondary institutions,” i.e. colleges and universities. Rather than zapping our energy and attention, this environment invigorates us to pay attention to innovations as they occur, which may also impact investment theses. The evolution of colleges and universities serves as a microcosm of the opportunities that we expect will be created through population dynamics locally, nationally, and globally.
Colleges and universities are probably a bit overbuilt, sans immigration effects
Total undergraduate enrollment steadily rose from 2.6 million in 1955, to 8.5 million in 1970, to 21.0 million in 2010(1) and has slowly but steadily declined since to 18.1 million in 2023.(2) Recently, 62% of people who completed high school or earned a GED immediately enrolled in college vs 70% in 2009.(2)
The number of degree granting postsecondary institutions steadily increased from 2,004 in 1959, to 2,525 in 1970, peaked at 4,726 in 2012, and was down to 3,896 as of the 2022/2023 academic year.(3) While there is booming interest in colleges and universities in the Southeast, new colleges have not been popping up to fill the interest. Between 2016 and 2021, 16 colleges in New York and Massachusetts closed, and 50 closed or merged nationwide.(4,5) We have noticed a slow but steady drip of press releases indicating that schools have chosen to merge, which infers that many of those schools considered closing.
We sense that a growing number of people see the cost of college, potential high amounts of student debt, and the opportunity cost of studying instead of beginning a career, as major risks. Furthermore, we sense a growing number of people see college as unnecessary. Our take is that college used to be where one accessed brilliant minds to acquire skills and “tools for the toolbox,” and now a college degree is more of an insurance policy to check a box in a human resources file providing a place to go and things to do for people who are physically adults but not yet primed to live independently.
If that weren’t enough, another headwind will begin materializing in 2025 as the drop in births and birth rate that started during the Great Recession (2008) creates a drop in the number of people 18-24 years old. Unfortunately for colleges, the headwind will persist for many years as the number of births and the birth rate continues to decline.(6,7)
However, we do not expect all colleges and universities to fail. Two recent Wall Street Journal articles have illustrated the evolution that is occurring and illustrate how learning institutions can remain viable. First, an increasing amount of Northerners are going to Southern public schools because of lower costs as well as a greater sense of “community epitomized by the South’s football Saturdays.”(8) Another example is the expansion of Vanderbilt University, based in Nashville, Tennessee, adding additional campuses in Manhattan, New York and West Palm Beach, Florida. Vanderbilt is tying these campuses to local communities for the job prospects they offer for careers in industries such as finance, fashion, data, technology, and media.(9,10)
The U.S. remains the primary country in which innovation occurs
The chart below, courtesy of our friends at Deutsche Bank, shows the twenty five largest companies in the primary U.S. and E.U. stock market indexes, by market cap on the Y axis and by year founded on the X axis. The chart was generated in response to former European Central Bank chief Mario Draghi’s comment that “there is no E.U. company with a market capitalization over €100 billion that has been set up from scratch in the last fifty years, while all six U.S. companies with a valuation above €1 trillion have been created in this period.”(11) In our view, the cultures of Europe have not faced or created enough disruption to crank the engines of innovation in over 50 years. It is also worth noting that European birth rates declined and then stagnated at lower levels during those 50 years.(12)
Market forces will ultimately solve the problem for higher education
Quite a few companies (e.g. Alphabet, Microsoft, Meta, and IBM) apparently do not feel a bachelor’s degree provides new hires with all the necessary skills, because the companies dropped the degree requirement for some jobs and created “certificate programs” and “bootcamps” in which the employee or aspiring employee enrolls to learn specific skills and earns a certificate upon completion. Several struggling colleges are turning to things like certificate programs and bootcamps to provide the most relevant form of education. Brilliant minds that used to be accessible primarily through an in-person college class are now available online and often at a low cost or even free, which is a superb antidote to decades of runaway cost inflation in education. A bachelor’s degree is no longer required for a growing number of federal and state government jobs, and BOTH Harris and Trump expressed interest in ending unnecessary degree requirements.
The U.S. seems to have a culture that fosters large scale disruption and innovation and will manage through the coming demographic challenges in interesting and transformative ways. We are on alert for ways this may positively and negatively impact investment theses and the long term opportunity sets available to public companies.
(2) https://www.bestcolleges.com/research/college-enrollment-statistics/#total-enrollment-statistics
(5) https://www.highereddive.com/news/how-many-colleges-and-universities-have-closed-since-2016/539379/
Redmond Asset Management, LLC October 2024
The opinions contained in the preceding commentary reflect those of Redmond Asset Management, LLC (RAM). The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Redmond Asset Management, LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.
Redmond Asset Management, LLC is an independent, SEC registered investment management firm located in Richmond, VA and is not affiliated with any parent organization. RAM was founded in 2005 and registered with the SEC on December 22, 2005. The company offers investment management services for equity, balanced and fixed income portfolios to corporate, institutional, and individual investors.
