ECONOMY AUGUST 22, 2011
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This article is a contribution to 'Is There Anything That Can Be Done? A TNR Symposium On The Economy'. Click here to read other contributions to the series.
Various flashy stimulus packages—whether through the spending measures typically advocated by Democrats or the tax cuts regularly pushed by Republicans—remain a constant and tired refrain in our political debate. But if programs like George W. Bush’s 2001 tax cuts and Barack Obama’s Recovery Act tend to dominate the news, in the long run our living standards are determined by the compounded effect of productivity growth over decades. Productivity growth, in turn, is determined in a modern economy by a combination of institutions and human capital.
Unfortunately, there's no one big answer for how to improve either of them. Both require sustained work, a willingness to experiment, and a good deal of luck. What's clear is that we’re better off abandoning our grand, comprehensive designs, in favor of more nimble and modest plans.
Here are three ideas that are not being advocated adequately in the current Left-Right political debate that I think would prove a big help over the long term.
1. Deregulate schools. A publicly-funded private school is a contradiction in terms; with predominantly public funding comes the inevitable and appropriate demand for public accountability. But we need public schools to have greater flexibility in how they do their work—both in order to discover improved methods and also to tailor approaches to different kinds of students—while simultaneously exposing them to the kind of unsentimental feedback loop for school performance that markets can provide. Education is an industry representing about 4 percent of GDP that is badly in need of deregulation.
School deregulation is much broader than “school choice,” and should have two key components. First, the federal government should establish a comprehensive national exam by grade level to be administered by all schools that are materially publicly funded. We should require each school to publish all results, along with detailed data about school budgets, performance, and so on, each year. Second, continued federal funding should be contingent on states’ passing model-schools legislation that creates simple, uniform rules for establishing new charter schools, and establishes the absolute requirement that funding follows students.
The primary role of the federal government would be to ensure consistent, high-quality information, provide normal market regulation to allow education providers to achieve efficient scale, and sponsor rigorous basic research on educational practices. The role of education providers would be to compete entrepreneurially within this framework.
This is not a panacea. In a nation in which about 40 percent of all births occur out of wedlock, many children will be left behind. But better schools will create material improvement. And this method is not theoretical: Versions have already been implemented successfully in Sweden and the Netherlands, and a similar program is being implemented in Britain now.
2. Treat immigration as recruiting. Assimilating immigrants is a demonstrated core capability of America’s political economy. It is a continuing source of vitality, and in combination with birth rates around the replacement level, creates a sustainable rate of overall population growth and age-demographic balance. But unfortunately, the manner in which we have actually handled immigration since the 1970s has yielded large-scale legal and illegal immigration of a low-skilled population from Latin America. It is hard to imagine a more damaging way to expose the fault lines of America’s political economy: We have chosen a strategy that provides low-wage gardeners and nannies for the elite, low-cost home improvement and fresh produce for the middle class, and fierce wage competition for the working class.
Instead, we should think of immigration as an opportunity to improve our stock of human capital. Once we have re-established control of our southern border, we should set up recruiting offices looking for the best possible talent everywhere: from Mexico City to Beijing to Helsinki to Calcutta. We should offer green cards to foreign students upon their completion of degrees in science and engineering subjects at approved universities. The H-1B visa program should be expanded and strengthened. On the other hand, we should de-emphasize family reunification for immigrants already in the United States.
Australia and Canada have demonstrated the practicality and utility of skills-based immigration policies for many years. We should improve upon their example by using testing and other methods to apply a basic tenet of all human capital-intensive organizations that are managing for the long term: Always pick talent over skill. It would be great for America, as a whole, to have, say, 500,000 smart, motivated people move here each year with the intention of becoming citizens.
3. Prioritize science and technology. Every economically advanced society understands that technological innovation is a key to productivity growth. Trying to plan out the development of various technologies and sectors is a fool’s errand, but the relevant responsibilities of government are to help ensure that conditions for innovation are present, and to invest in appropriate science, technology, and infrastructure projects that would not make sense for a private actor.
We should dramatically increase the budgets of our most successful government and government-backed university R&D institutions: the National Institutes of Health, the Defense Advanced Research Projects Agency (DARPA), Caltech, and so on. We should be consciously elitist about reinforcing demonstrated technical excellence, while constantly experimenting with new entities and concepts—such as a DARPA analog focused on new energy technologies and prize-based competitions for achieving specified technical benchmarks open to all comers. Our funding mechanisms should be ruthless about killing off the majority of these new ideas that fail, and pointing a fire hose of money at those that succeed. We should have national technical projects at the scale of the moon landings or the War on Cancer, and should spend past the point of apparent waste. These investments would be synergistic with better education and immigration policies. We would reinforce our position as a magnet for talent, improve our pipeline of domestic talent, and mobilize both more effectively.
To be sure, the money for all of this has to come from somewhere. This is the “prioritize” part, none of which will be painless, and all of which is easier said than done. But there are a number of places where the money can be found. We should make funds available by scaling back our global military commitments, and reducing expenditures under various entitlements programs—for example, by taking some money that would have been spent on providing a given drug to patients under Medicare, and investing it instead in research to develop a better drug (and, not incidentally, create large, positive economic externalities). While not my preference, political reality likely means that taxes will also have to rise. Ideally, we would do this in the context of tax reform that trades extensive simplification for a small net revenue increase. Regardless of where we ultimately find the money, however, if we use it to enact an agenda like the one outlined above we can be confident that it will be money well spent.
Jim Manzi is a senior fellow at The Manhattan Institute, and the founder and chairman of an applied artificial intelligence software company.
25 comments
"[I]n the long run our living standards are determined by the compounded effect of productivity growth over decades." If only: From 1980 to 2005, more than 80 percent of total increase in Americans' income went to the top 1 percent of earners. We cannot expect the majority of Americans to be very interested in increasing productivity if most of the increased wealth goes to only 1% of the population.
- jonrysh
August 22, 2011 at 3:08am
Jonrysh, I agree that wage inequality is a problem. If you click on the link above and to right under "more from this author" on "will more years in school...", you can see my detailed thoughts on relating productivity growth to wage inequality. Best, Jim Manzi
- jmanzi
August 22, 2011 at 8:03am
If we are going to get a net increase in [potential] tax revenue, then it needs to be vastly net positive. We are at the bottom of the pack in terms of our tax take to fund government, and we have a very confusing and porous safety net. Ten times as many people uninsured than on welfare, and ten times as many people below the poverty line than receiving welfare. A real unemployment rate (as most countries calculate it) around 15-16%, with very little being done to try to ensure that the long-term unemployed don't become structurally so. Right now we need government to employ the long-term unemployed, ensure that poor people either have a job or enough to live on (and we just cut food stamp funding, effective in a few years), and use this opportunity to make good on the Republican line of "equal opportunity". This is as good a time as any to universalize health care spending with a single-payer system, because this would simplify health care costs for employers and remove that negative pressure on wages and hiring from their operations. Our bad schools are more a consequence of poor and broken families whose children are effectively forced to go to the same schools together. Schools are generally funded by the local tax base, so if rich people can move to expensive communities and pay for good schools, they do. This is why you never hear about school reform and charter schools in well-to-do suburbs. In fact, poorish people who go to school in these schools do better. The main impediment to fixing our schools problem is poverty and societal dysfunction. There is no quick-fix to this, and 'deregulation' is just a knee-jerk partisan talking point. In fact, it's one that Manzi mangles: he would have the federal government produce and administer a standardized national exam, which doesn't regularly happen today. This is an additional regulation, and one that I personally support, but it's disingenuous to say that fits into a deregulatory agenda, and as you should know from observing the financial and real estate industries over the last decade, deregulation is usually bad. We could stand to pay our teachers more, and this may require more flexibility to fire underperforming teachers, but it's not like 1/3 of teachers are terrible or you can attract a much greater amount by cutting school funding or asking them to teach in largely unaccountable charter schools. The immigration as recruiting point is largely correct, though. I don't think it's within the imagination of the "build the danged fence"/"anchor babies!" party, though. The science point is also largely correct. We could stand to fund quite a bit more scientific research and development and to increase the private spin-off sector while we do so. We ought to do this in conjunction with bringing some accounting reality to our tertiary education sector, though. It doesn't make sense to cut higher education funding and rely on private philanthropy or magically richer parents and students (in a recession!) to take up the slack. It also doesn't make sense that our universities cost so much and that sticker price is floated down to households who struggle to gross that much money per annum. We could stand to subsidize university education to a higher degree while we're increasing science budgets. Another thing that flies afoul of the party that goes out of its way to be anti-science. Another thing that needs to be paid for by increasing the revenue side of our government's operations, even though it's manifestly obvious that we can't get real revenue increases while Republicans are near the controls of any sort of federal power. If you really think about it, Obama's political platform and domestic agenda heavily aligns with Manzi's essay: win the future through restructuring education, a coherent immigration policy that prizes skill, and increased science and entrepreneurship around it. And Obama is as good a source as any in diagnosing why it can't get done: he's trying to put the car in (D) while his co-pilots want to change gears to (R).
- chaitless
August 22, 2011 at 8:23am
But even if one accepts all of this, it has something to do with long-term productivity and nothing to do with the recession. We have to reform our schools to get out of the recession? As well, a lot of this is likely wrong. The primary driver of productivity gains is wage pressure, which means full employment. That's what pushes capital to reorganize work and substitute capital for labor. We need to boost demand dramatically in the short-term and use the simplest lever to increase income equality - progressive taxation. Greater income equality sustains the demand that sustains employment that sustains wages that generates productivity gains and reduces the poverty or paucity that has a lot to do with other problems. As pointed out above, middle class schools in good neighborhoods are not in trouble. Long-term (not recession related), we need many fewer students looking to get into the Wall Street casino, most of the earnings of which amount to printing money, or start the next Facebook (every 20-something I know has a "social networking startup" these days) but lured by the prospect of a good, prestigious, well-paid job in any technical field. The lure of capitalist wealth has become counter-productive as people now feel, justly, that, unless they can win the entrepreneurial lottery, that cannot enjoy secure, comfortable lives. That makes high-level jobs unappealing -- except to immigrants whose prospects at home are a lot bleaker.
- roidubouloi
August 22, 2011 at 8:55am
Jesus Christ, I waited to read this last of the three econ entries--had a dinner session on the genomics of sepsis if anybody's interested--but now I see that it's the worst of a bad lot. TNR asks, "What can we do about the economic depression?" Experts reply: "Not a goddamn thing." Actually, if the experts did answer with such bracing honesty would be refreshing. Instead we get nonsense like "deregulate schools" and "recruit immigrants." And you know what, maybe these are worthwhile suggestions generally speaking, but what do they have to do with the problem at hand, which is a whopping productivity gap? Both of this author's suggestions amount to ways to increase productivity. LACK OF PRODUCTIVITY IS NOT THE PROBLEM! It's the DEMAND, stupid!
- AaronW
August 22, 2011 at 9:16am
Hah, while I was tapping my post out on my phone, roi said much the same thing: productivity isn't the prob.
- AaronW
August 22, 2011 at 9:18am
True, roidubouloi. I wrote about the piece's content instead of questioning its title and the premise of its introduction. Just like with Social Security, immigration reform, education reform, and science funding represent medium- and long-term problems we must contend with. Social Security reform is probably the longest-term and easiest to fix. Education reform that addresses the social determinants of poverty and bad schooling (80% of it is outside of the school, which even Michelle Rhee admitted in a debate with Diane Ravitch) is probably the most urgent and most difficult to fix. These problems are much more complicated than solving our current mess, which consists of low demand (Keynesian stimulus through direct government spending can fix this), high unemployment that is not yet structural (a stimulus that had the government directly hire people until the demand was there for them to be hired by private industry can fix this), and a massive debt overhang that is linked to plummeting real estate values (renegotiating mortgages to force banks to take a loss, as well as debt forgiveness programs a la "More Than Wheels", a program that helps people afford their cars: http://opinionator.blogs.nytimes.com/2011/08/11/on-the-road-and-out-of-the-red/). In fact, by saying that emergency measures like bailouts and stimulus aren't the answer to fixing our economy right now, but instead the much more complicated areas of immigration, education, and restructuring the economy around scientific innovation are, this essay advances the gimmick that our current problems have some magical solution that hasn't been tried yet, so let's try to find that solution instead of actually pursuing things that have economic theory behind them, like stimulus. On a related note, I had brunch yesterday with a few people who represent the fleecing of America's productivity--smart, young people who with math and science degrees who are now working on Wall Street. Admittedly, I'm one who is now in the medical industrial complex. But one of them tried to convince another economics PhD student that he would really enjoy working for a hedge fund. My generation goes to medical school, law school (they really shoudn't), or finance because we want an out-of-the-box way to move higher or maintain upper-middle-classness. If middle management of manufacturing had as many positions that could do that, smart young people would go into that, too. In looking at the historically astronomical amount of higher education debt, we crave financial stability and can add a few positions (finance, IT engineering) to the known upward mobility ladders. I'd say it is definitely NOT the responsibility of Generation Y, with little in the way of accrued capital, to create out of whole cloth the innovation engines that will employ millions of US workers at middle class wages. That level of systemic change can't be effected by people in their 20s. Of course, that also probably means that the Baby Boomers are failing us right now, as their continued misallocation of resources, over and beyond the stuff that happened in the 1980s business world, is shifting middle class jobs overseas, putting young and unborn generations into debt, and increasing the pressure to take out-of-the-box professional class jobs.
- chaitless
August 22, 2011 at 9:30am
"...a DARPA analog focused on new energy technologies..." Forgive me, but don't we already have that agency, and isn't it called ARPA-E?
- benjamin81
August 22, 2011 at 11:31am
- wkwami
August 22, 2011 at 11:48am
I love how these authors throw out stats about attracting "the best and brightest" then use small countries for their examples. Canada has a population of 34M, Australia around 23M. They have a small pool of labor to begin with and vast natural resources to exploit; they also don't have a huge number of advanced universities. The US? Population of 313M. We don't need to look far and wide like countries less than 1/10 our size to find the talent. We need to encourage our own; the author is like others that want the cheap, easy way out and not pay Americans what they're worth. Notice he doesn't mention first encouraging Americans into science fields anywhere in the article, just "deregulating education". This "prescription" Manzi gives is the reason American kids don't want to go into engineering: it's a dead end. "Let's bring in the foreigners to do it all" the captains of industry proclaim. Me, I'm waiting for a board of directors to outsource the CEO job out of the country to a guy who'll work for 1/10 of what the American gets. Hey, they talent has gotta be better than the American since obviously they have more talent overseas since they have better tech talent. I don't see China nor India using lures to get foreign talent; they don't need to due to a good size population. TNR you've convinced me that I should outsource my subscription next time around to a cheaper foreign publication. Their journalists and editors are just as good or better than Americans but at a fraction of the cost. Enough with the management consultant sourced articles.
- tmmats
August 22, 2011 at 11:48am
http://www.tnr.com/blog/jonathan-cohn/93905/jobs-program-obama-republican-stimulus-infrastructure#comments
- wkwami
August 22, 2011 at 11:50am
Benjamin81 That is exactly the agency to which I was referring. AaronW Sorry that you found this stupid, and believe that I am entirely unfamiliar with the concepts beyond stimulus. Wkwami, The author doesn't normally write the title. Tmmats, I think that not all human wisdom resides inside the bordersofthe USA, and that it's actually a good idea to look for practices that work elsewhere as food for thought. I also think there's a pretty long track record of human talent moving to America, and in the long run, enriching it.
- jmanzi
August 22, 2011 at 12:09pm
Hi jmanzi, I don't find it stupid at all, and I did not use the word "stupid" nor suggested anything of the sort. I merely pointed out that we ought to be doing both; it ought not be an either/or approach. I am however pleased that you read and respond to the comments. That's a good thing.
- wkwami
August 22, 2011 at 12:40pm
Mr Manzi, you never, ever mention in your article to grow the talent inside the US. The biggest reason the medical, finance and legal professions never have a shortage of talent is due to the outsize pay. Science and engineering don't have that advantage so your "solution" is make the situation worse. In typical consultant fashion you immediately reach for the easy, cheap and ultimately wrong solution. It's typical MBA consultant think, just import the solution and take the easy way out while taking a big paycheck for wrecking the place. The US tried a different tack in the 1950s in reaction to Sputnik: it spent big on developing the talent at home. That investment resulted in making you a rich man at Lotus among other things. Funny how that never gets mentioned. It's quite fascinating that I never, EVER hear of a world-wide search for a new CEO of a US-based company that results in a hire who's paid 5c on the dollar the previous American received. Why not? Aren't we after maximizing shareholder value? Why isn't there talent abroad that can bring in wisdom to run the place better than the last guy? And be sure to bring him in on an H1-B while you're at it. In fact, we don't even have to bring him (her) here to the States, we can just outsource the job. If it's good for the goose....
- tmmats
August 22, 2011 at 12:53pm
Mr. Manzi, This one line really explains your entire piece in a nutshell: "Ideally, we would do this in the context of tax reform that trades extensive simplification for a small net revenue increase." Why would this be so? Why if the goal is deficit reduction and finding the funds to do important things is only "a small net revenue increase" what is needed. What we need is a large net revenue increase and a large spending increase. This unsubstantiated slip tells us that you are firmly of the view expressed by the title that you claim not to have chosen -- that we should forget about every response to recession for which we have a sound theoretical basis and instead undertake things that, at best, will not change our economy significantly for years or decades. Between the slip and the title, you disclose that you are swimming in supply-side Kool-Aid, even if you claim not to be swallowing any.
- roidubouloi
August 22, 2011 at 2:24pm
Roid, check Manzi's past if you're not familiar with it. That explains his entire article. If these 'articles' are the typical thinking at a TNR symposium, then it's time I let my subscription lapse. It reinforces the idea that there's no difference in the way anyone in the DC elite sphere thinks, especially in the economic realm. No wonder the country is sinking fast.
- tmmats
August 22, 2011 at 6:01pm
Tmmats, What past is that, and how does it explain this article? Best regards, Jim Manzi
- jmanzi
August 22, 2011 at 6:42pm
James "Jim" Manzi (pronounced /ˈmænzi/[citation needed]; born 1963) is an American businessman and political commentator. He is currently the chairman and managing director of Applied Predictive Technologies, a business analytics software company, a contributing editor at the National Review, a senior fellow at the Manhattan Institute, and a contributor to a variety of blogs. http://en.wikipedia.org/wiki/Jim_Manzi_%28political_commentator%29 _______________________ So, why are the three the things in this article, all of which, whether you buy them or not (and I mostly don't because they all misconceive cause and effect), are directed to long-term changes in productivity, contrasted here with "bailout and stimulus" both of which, whether well or ill-conceived, are directed at the immediate crisis of recession? What does one thing have to do with the other? Manzi sort of, kind of disavows the title, but opens with this: "Various flashy stimulus packages—whether through the spending measures typically advocated by Democrats or the tax cuts regularly pushed by Republicans—remain a constant and tired refrain in our political debate." Tired refrain? Obviously, Manzi is not the slightest bit concerned about high unemployment and its toll on people, families, communities, output, and our human and physical capital base. Personally, I'm not the least bit tired of this refrain, but I sure as heck am tired of economic royalists who will not tolerating us using the only effective tool we have to replace missing private demand -- public demand.
- roidubouloi
August 22, 2011 at 7:07pm
The ideas in the article, if helpful, are long term. To that end, they don't replace stimulus, which is short term priming. The government playing a long term role is extremely valuable because capitalism is great at chewing through resources like forests and oil, or clean air and water, while oblivious to the long term effect. I would like to get rid of the 15% capital gain subsidy for the stock market because I think it moves money away from small business, with a top tax of 35% into the stock market. Replace it with a dividend deduction for publicly traded companies to get rid of the slant in favor of wages (deductible) over dividends (non-deductible).
- Nusholtz
August 22, 2011 at 10:28pm
My points deftly ignored. Nice.
- chaitless
August 23, 2011 at 1:02am
Say what?
- roidubouloi
August 23, 2011 at 6:48am
We're used to being ignored and suddenly when we're not ignored, someone's feelings get hurt. There's a lesson in here somewhere.
- Nusholtz
August 23, 2011 at 6:58am
"First, the federal government should establish a comprehensive national exam by grade level to be administered by all schools that are materially publicly funded." Good luck trying to get agreement on the test's content and standards, especially if real consequences follow the results.
- dsimon
August 23, 2011 at 11:57pm
Why do we need a symposium on the economy by The New Republic? The ineptness of this president seems contagious. The mediocrity of the contributors and their proposals are so out of the real world that are both sad and laughable. This is a syndrome of some sort of illness of the burgoisy. While millions of Americans are out of work and millions of homes are under foreclosure , we have this symposium with contributors proposing such long term solutions that are unreal. And these guys work for reputable institutions!! It is clear that the American people are not represented by these folks, neither by the politicians, nor the whole media. We have two big worlds the haves and the have nots. As long as the latter do not get organized and fight really fight for their rights they will continue going down in the gutter. Really they deserve what they are getting. Read Cornel West article in today's New York Times, "why Matin Luther King Jr weeps". That is the real world of the have nots. That is the advise and action the have nots need to take. Not the silly superfluous proposals of mediocre contributors to TNR "economic symposium" shame shame shame.
- JAIMECHUCH
August 26, 2011 at 9:52am
The firehose approach to science funding has a long and not very successful history. While it is clearly a good idea to increase R&D funding, and to ease immigration limits on the technical people who could use the funding, it is not realistic to assume that rapid increases in funding will produce good results. A steady, thoughtfully managed stream of research funding will be much more effective. Less sexy to be sure, but better in the long run.
- gwcross
September 6, 2011 at 4:45pm