Ed Glaeser’s advice to the GOP:
Today, human — not physical — capital determines economic success. If we want to make sure that our children are wealthier than the Chinese, we will have to make sure that they are better educated. If Republicans really want to become the party of long-run economic success, they will also need to become the party of human capital: the leaders who understand that we will stay a great nation not by providing a more generous safety net for the elderly but by investing more in our young.
Yes — and no. Yes, human capital is important in the I-Cubed Economy. No, education is not the silver bullet. Building and deploying human capital goes far, far beyond education. As I’ve written before, we need a “high road” strategy to actually utilize that human capital. Creating high performance work organizations require changes in numerous policy areas — including changes to technology policy to focus on the developing and deploying the needed tools and techniques. Other areas include tax policy, labor policies, and trade policy.
So Glaeser’s advice to the GOP is partly right. Not investing in education is a guarantee of economic failure. But the reverse is not true. Investing in education is only the starting point to restoring economic competitiveness. So much more needs to be done.
Yesterday, I discussed my concerns over the deficit reduction plan of the National Commission on Fiscal Responsibility and Reform. I should have noted that this is but one of a number of plans that have come out. And yesterday yet another plan was announced: Investing in America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility. Put together by DEMOS, the Economic Policy Institute and The Century Foundation, this plan has a distinctively leftward orientation.
I’m not enamored with everything in this budget. For example, I think the call for no spending cuts until the unemployment rate reaches 6% is a formula for simply putting off needed cuts.
However, the reports focus on investment — especially the return on public investment — is a welcome addition to the debate. Their Appendix G summarizes the case very well. My only argument is that it stops with traditional investments in education, infrastructure and R&D. We need a broader look at investment in knowledge and intangibles creation — and at the role of the public sector in making and fostering those investments.
All of the talk in Washington right now is about deficit reduction. I don’t question the need to bring the deficit down. I do question the means of how to do that. Done right, deficit reduction will help put the economic on a path of sustainable economic growth. Done wrong, it will hobble our economy for generations. And I am deeply worried that we are on the path of doing it wrong.
Of specific concern is an apparently underlying philosophy the proposals that government has no role in growing the economy.
Let’s just look at the National Commission on National Commission on Fiscal Responsibility and Reform. The co-chairs proposal includes a principle of promoting economic growth and competitiveness with the following two points:
• Cut red tape and inefficient spending that puts a drag on the economy and job creation.
• Invest in education, infrastructure, and high-value R&D.
The first point speaks for itself — “just get government out of the way.”
The second point would make sense – it is the standard consensus mantra. However, as the SSTI summary points out, the illustrative list of cuts makes a number of cuts in R&D and economic development programs. And the justification for the cuts again is based on the old the-market-can-do-no-wrong mentality. For example, it proposes eliminating the highly successful MEP program on the grounds that it “supports inefficient companies that would otherwise go out of business.” In other words, the government has no business helping companies. Of course, this is a complete misreading of the MEP program — implying ongoing subsidizes rather than needed technical assistance.
The list of cuts also calls for the elimination of the Economic Development Administration — citing, in part, studies from 1980, 1986 and 1999 as justification. One of the standard rationales for eliminating EDA has been that it no longer focuses just on distressed areas. To me, that is a good thing. The issue of sparking economic growth goes well beyond the old assumptions that all we have to do is help those who have fallen behind. As Brian Darmody (Immediate Past President, Association of University Research Parks and Associate VP for Research and Economic Development, University of Maryland) has stated, “EDA’s recent reforms to link its programs to commercialization, job creation, and an innovation economy should be applauded, and not criticized as straying from ‘its core mission of supporting depressed areas.'”
Unfortunately, the issue for the Commission is one of credibility. Based on what I have seen in the illustrative list, I’m not sure they understand which programs are important to economic growth and which are not. They seem to be approaching the issue from the starting point that no government programs are useful. And that is bad bias to bake into the process.
Frankly, if we are going to have a serious debate about the deficit, we have to get past simply pulling out the tired old list of anti-government ideas.
Each holiday has its own special characteristic. Christmas is about gift-giving. Halloween is about kids. Easter is about spring and renewal. Thanksgiving is about food.
So here is a thought provoking article on agriculture for your Thanksgiving holiday enjoyment — Is Our Agricultural Technology Innovation System Up to 21st Century Challenges?. Written by Professor Paul Thompson of Michigan State University, the piece argues that:
Americans have been disinvesting in agricultural research for the last three decades. Our agricultural innovation engine has become too narrowly focused on piecemeal adjustments in plant and animal genetics, to the exclusion of potentially valuable research into alternative, low-input methods such as organic, no-till, and poly-crop agriculture. This leaves us in a dangerous position with too few options for the future.
I’m not sure I would go as far as argue that the emphasis on plant and animal genetics has been misplaced. But my earlier posting on the transformation of Brazilian agriculture point out the importance of more than just genetics. To quote the story on this transformation from the Economist — “The miracle of the cerrado“:
Brazil’s agricultural miracle did not happen through a simple technological fix. No magic bullet accounts for it–not even the tropical soyabean, which comes closest. Rather, Embrapa’s [Empresa Brasileira de Pesquisa Agropecuária, or the Brazilian Agricultural Research Corporation] was a “system approach”, as its scientists call it: all the interventions worked together. Improving the soil and the new tropical soyabeans were both needed for farming the cerrado; the two together also made possible the changes in farm techniques which have boosted yields further.
In other words, they used information, intangibles and innovation to work a transformation.
All of this reinforces a point that I have been saying for some time: economic growth and development is all about transformation in all sectors of the economy.
Unfortunately, this concept of transformation is not clearly understood. It gets distorted into an idea of transition for one part of the existing economy to another. For example, some continue to say we can abandon manufacturing. It is the natural order of things for other countries to take over as making things. Just as we moved from agriculture to manufacturing, so are we moving from manufacturing to services/information/knowledge.
Wrong. Wrong analysis based on wrong history. As this country’s economy “progressed,” we did not abandon agriculture. We transformed it. We did not transition from one set of existing economic activities to another set. We created new forms of economic production and activity.
That process should not stop. As Thompson’s piece points out, we need to continue to transform agriculture by renewed attention to alternative methods. As I have long argued, we need to transform manufacturing as well.
So as you enjoy your Thanksgiving feast, think about how far we have come since the days of the first Thanksgiving. And think about how we continue to grow, innovate and transform.
Today’s new “second estimate” of the 3Q GDP shows a significant revision upward to 2.5% (the preliminary estimate last month was 2%). This is much better than the 1.7% GDP growth in the 2nd quarter. In part, the trade numbers (specifically exports) came in better than expected.
However, as the news stories note, this is not strong enough to bring down the unemployment rate. And real GDP has not yet gotten back to where it was when the economy peaked in the 2Q 2008.
So this is good news — but only partially good news. We still have a long way to go to reach a healthy economy.
Last week, I posted a piece on the role of the states in administering the health care reform efforts. As I argued, health care (both availability and cost) is a key factor in economic competitiveness. Different states are likely to take different routes with respect to setting up a cornerstone of the reform efforts: the health insurance exchanges. That sets up a nature experiment as to which approach will be best to boost state economic competitiveness.
In his column today, Ezra Klein takes up the argument about experimentation (“Health-care proposal would let states decide what ‘real reform’ is”). Klein discusses a bill by Sens. Ron Wyden (D-Ore.) and Scott Brown (R-Mass.) to expand states’ ability to set up various systems. The bill, S.3958 Empowering States to Innovate Act, simply moves up the start date for a state waiver provision that Wyden, and Sen. Bernard Sanders (I-Vt.) got in the health care reform legislation — but was delayed until 2017. As Klein notes:
What Wyden and Brown are offering is the chance for the various sides to prove that they’re right. If industry players make the system work better, then the states that prize their involvement will prosper. If conservative solutions are more efficient, that will be clear when their beneficiaries save money. If liberal ideas really work better, it’s time we found out.
I’m sure that there will be all sorts of arguments against this. For example, I’m sure that some companies will complain about the possibility of having to cope with 51 separate plans (yes 51 — remember DC counts as a state in such matters even though we don’t have a vote in Congress). In part I suspect that delay until 2017 was to give time for a “national” system to be set up that would then be harder for the states to modify.
On the other hand, as my earlier posting points out, we are already headed into a situation of state experimentation. So let’s do it right — rather than half-ass. If Vermont sets up a workable single-payer system, then we will have some important information. If Mississippi’s approach to health care raises the economic competitiveness of that state, then we will have additional information.
So let the grand experiment begin! It can’t be much worse than the dysfunctional system we have right now.