Forget Bailouts and Stimulus. Let’s Think Small.

by Jim Manzi | August 22, 2011

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.

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