Probably the most important and intractable economic problem we face is not restarting the economy after the financial crisis, but the decades-old problem of stagnant wages for the lower and middle classes and the consequent massive increase in income inequality. This is something that Raghuram Rajan brings up in the first chapter of Fault Lines, and, like many people, he points the finger at education. Citing (like everyone else) Claudia Goldin and Lawrence Katz, he writes (pp. 22-23),
“As agriculture gave way to manufacturing in the mid-1800s, the elementary school movement in the United States created the most highly educated population in the world. . . . The high school movement took off in the early part of the twentieth century and provided the flexible, trained workers who would staff America’s factories and offices. . . .
“Recent technological advances now require many workers to have a college degree to carry out their tasks. But the supply of college-educated workers has not kept pace with demand–indeed, the fraction of high school graduates in every age cohort has stopped rising, having fallen slightly since the 1970s.”
There are certainly many problems with our educational system. Rajan lays some out, and Arianna Huffington has a longer discussion in Third World America (pp. 113-21). The list includes huge disparities in early childhood preparation; expensive college tuition and insufficient financial aid; the property tax funding system for K-12 education, which means that rich towns (usually) spend more on their schools; unions that make it impossible to get rid of bad teachers; the fact that we don’t even know what exactly makes a good teacher; and, though not that big a factor, the fact that some parts of the country insist on teaching children that human beings aren’t subject to the laws of evolution.
I don’t claim to know how to fix our educational system. But I have an idea about why it hasn’t been fixed, which I’m sure someone can write up as a cute two-period economic model. Assume that society is divided into the capitalists and everyone else, and the capitalists make investment decisions for society as a whole. Until 1980, if the capitalists wanted to make more money, they needed to invest in technology, which meant they needed an increasingly educated workforce, and therefore they were willing to invest some of their profits (via taxes and public schools) in education. And, according to Goldin and Katz, from 1930 to 1980 the average educational level of Americans increased by 4.7 years.
But since 1980, and especially since 1990, the world has become more open. If the American capitalists want to make more money, they still have to invest in new technology, and they still need an increasingly educated workforce. But now, because of globalization, they can get that workforce anywhere in the world. You can think of this as arbitrage: China doesn’t have that many college graduates as a proportion of its population, but they come cheaper than American college grads. Or you can think of it as free riding: if China (or Korea, or India, or Brazil, or anywhere else) is willing for whatever reason to invest in increasing the number of domestic college graduates, the American capitalists can simply expand their operations over there and save themselves the trouble and expense of investing in the American educational system. (And for China, the returns on investment in education might be higher than the returns for America, because the marginal productivity of new investments in education is probably higher.) And as a result, average educational attainment only went up by 0.8 years from 1980 to 2005.
Put another way, if you own Accenture–the largest consulting firm in the world–and you can hire all the talented, educated people you need in India, what incentive would you have to invest your profits in the American educational system? Why not just move to Bermuda and leave America’s problems behind?*
I have long had this instinct that it is the interests of big corporations that determine government policy in the United States. This instinct is certainly wrong in detail (how do seven years of war in Iraq serve American business?) but, I think, possibly right on a high level. Applied here, it means that if our large corporations needed better domestic education in order to make more money, then one way or another it would happen, just like it happened for the first two centuries of our history. But since they don’t need it anymore–at least as long as they can free ride off of other countries’ investments in education–it won’t.
* Actually, I checked Wikipedia and apparently Accenture moved its residence from Bermuda to Ireland.
Originally published at The Baseline Scenario and reproduced here with the author’s permission.