Education and the Economy: If We’re So Dumb, Why Are We So Rich?

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At some point, if we are to retain the lead in the global economic race, we will have to rely on our homegrown and homebound human capital for our competitive edge.

Once again a set of major international assessments shows American students lagging in international performance in mathematics and science. In math, the 2003 Trends in International Mathematics and Science Study, or TIMSS, ranked our 4th graders 14th out of 25 participating nations. We did better in science, outperforming 16 of the 24 other, mostly European and Asian, nations. The 2003 Program for International Student Assessment, or PISA, shows that about two-thirds of the other nations surveyed outperformed American students.

The PISA study is the latest in a steady drumbeat of reports on how American students aren’t measuring up globally. And it looks as though we aren’t gaining ground. Most disappointing in the 2003 TIMSS and PISA assessments, was that there was no real improvement since the tests were taken in the 1990s, despite our aggressive emphasis on standards-based reform and a huge increase in the share of students taking math, science, and other more rigorous courses. And it is not just K-12 education. Other indicators from the Organization for Economic Cooperation and Development show that we have slipped from No. 1 to No. 4 in postsecondary attainment.

Cause for concern? You bet. You don’t have to have the math scores of a rocket scientist to know that in the new high-tech economic world, math and science education is a key asset in global competition.

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But wait a minute. If we’re so dumb, why are we so rich? What explains America’s remarkable economic performance in the face of educational failure? To put it bluntly, if America’s so bad at math and science, how come we’re so successful in the new high-tech global economy?

Just look at the numbers.

Japanese students are always among the front-runners in international assessments, including the PISA and TIMSS studies. But the average purchasing power of American families is at least 40 percent greater than the average purchasing power of Japanese families.

In general, members of the European Union outperform us on TIMSS and PISA. But the U.S. productivity and gross domestic product per capita towers over the European Union nations’ showing by at least $10,000 per capita. And the U.S. unemployment is consistently less than half the European level.

How can we reconcile our educational failure and economic success? The answer is that we may not have the world’s best human capital, but we are pretty good and have more of it—and our economic agility allows us to use it more effectively.

We’re not the best educated, but we’re pretty good. We may not be the pacesetters in the global educational race, but we are in the middle of the pack in the chase to catch the breakaway leaders. And while we may appear to be stuck in mediocrity, compared with others among the world’s more developed nations, we are still bona fide members in the exclusive club of best-educated nations.

And, of course, it depends on which America we are talking about. There is much more variation in the American scores than in the scores of other nations, where education standards are nationwide and more tightly aligned to curriculum and teacher training.

Young people in America’s affluent suburban school districts do almost as well as the top students in the top nations, but American students in poor urban areas are invariably near the bottom. Average scores of American students reflect wide differences in performance, not universal mediocrity.

In the short term, being four times bigger than most of our economic competitors lets us get away with not being the best at school. On average, we may be in the back of the postindustrial pack on math and science but, because of our size, we tend to have more high performers than the nations who do better than the United States.

A nation can get away with not being the smartest when it has the biggest workforce and the biggest economy. For instance, our population is roughly four times that of France, Italy, and the United Kingdom, and three times that of Germany. As every economic and technology historian will tell you, knowledge, invention, and economic innovation are social, not individual, products.

More is not always better. But oftentimes, four pretty good engineers tackling a business problem can beat the pants off one very good engineer working alone addressing the same issue. Similarly, four companies in the software business competing directly against each other are likely to produce better software than a single company.

Our size also ensures that we have as many, and often more, of the brightest scorers in our workforce. For example, our student population is twice as large as the Japanese school-age population. As a result, the share of Japanese students in the top quartile of scores has to be twice as high as the United States in order to have as many high scorers as we do. Similarly, because we are four times as big as Italy, France, and Great Britain, and three times as big as Germany, the Italian, French, and British have to quadruple our share of top scorers, and the Germans have to triple it, in order to have the same numbers of excellent students as we do. And they usually don’t.

In fact, using the 1996 TIMSS data on 8th grade students, the Japanese rank fifth in math and we rank 18th; 64 percent of Japanese 8th graders scored in the top quartile of international benchmarks in math, compared with 28 percent of U.S. students. But because our 8th grade population is twice as large as the 8th grade population in Japan, there are 970,000 U.S. students in the top international quartile, compared with 928,000 Japanese 8th graders.

America’s agility gives us an edge in the global race. In the United States, labor markets are flexible, allowing employers enormous agility in hiring, paying, and allocating human resources. Even now, most American information-technology workers have no formal IT credentials. Pay varies with performance—and there are virtually no wage, benefit, or job guarantees.

In America, jobs are designed—and constantly redesigned—to maximize performance through an optimal mix of human capital, machine capital, and work organization. Our flexibility manages our returns on our human and machine capital investments.

Skill-based immigration is another source of flexible talent. Already, more than half our civil engineers and large shares of our technical and scientific workforce are foreign-born.

In Europe and Japan, by comparison, access to jobs is highly regulated by skill certification. And jobs are protected shelters from economic and technological change. The results? Job security and structural rigidity. There’s a place for everyone in the European and Japanese economies—and everyone stays in his or her place.

European and Japanese education and labor-market systems have a tough time redesigning jobs or shifting human and machine capital investments in response to economic and technological change.

Average scores of American students reflect wide differences in performance, not universal mediocrity.

America’s markets for skill are more flexible, encouraging institutional agility and reducing credentialing barriers to individual mobility.

But there is a dark side to America’s flexibility. It allows us to get away with underinvestment in human capital and makes us a nation divided into education haves and have-nots. Here, the cost of educational failure is borne by those with low skills, who are left with few options.

Ironically, while America’s robust economy is contributing to social inequality because it creates economic inequality based on differences in the opportunity to learn, the equity-based European and Japanese models are in trouble because their lack of agility ran them into an economic ditch when they had to make the last couple of hard turns in the global economic race.

In recent years, the equitable but inflexible European and Japanese models have driven up costs, suppressing job creation and driving up unemployment. In contrast, the agile American model has boosted job creation and income inequality .

America’s scale and flexibility have given us a competitive edge over the past few decades—albeit at an enormous cost in equity. The problem is that our advantages won’t last. We cannot remain a first-rate economic power with a second-rate education system.

Why won’t America’s agility and scale advantages last? Whose system wins the economic race in the long-term? First of all, it is clear that all forms of advantage are temporary in global economies. The European and Japanese versions of highly planned economies surged in the 1970s, but lost out to American flexibility in the 1980s.

Eventually, our competitors will narrow our economic lead as they learn how to create their own versions of agility and scale. At that point, the competition will really come down to who has the best human capital—especially in a world where people are still nation-bound, and technology and financial capital ignore national boundaries as they hop across borders from one entrepreneurial opportunity to the next.

The Europeans already have first-rate technology and human capital, and they are trying to build scale through the European Union. They are trying to become more agile with a slow but steady deregulation of their markets for skilled labor. Japanese technology is superb, and the Japanese are struggling with agility as well. Their maverick prime minister, Junichiro Koizumi, won because he promised to shake up Japan’s “static” economic and education systems.

Less developed nations also are trying to move up in the race and will become real competitors very soon. Nations like China and India certainly have scale. The Chinese economy is still inflexible, but it is opening up to market reforms slowly, while steadily growing its human and machine capital. Most economists agree that first India, and then China, will surpass us in overall economic output in the foreseeable future. And the quality of the Chinese, Indian, and Eastern European workforces has already grown to the point where those countries have become havens for outsourcing even our most skilled jobs.

Nor does demography favor America in the competitive race. After growing by more than 50 percent between 1980 and 2000, the American workforce will grow by only 17 percent between 2000 and 2020, as the baby boom retires. Tight markets for skilled labor are inevitable. The share of American workers with at least some college increased by 20 percent between 1980 and 2000, but is projected to increase by less than 4 percent between 2000 and 2020.

Of course, we could stop the boomers from retiring, go offshore, or turn to skill-based immigration to solve our problem. But these are political nonstarters. Technology might substitute for the missing skilled labor. But that’s just the economists’ version of magical thinking. Besides, with half-a-trillion-dollar deficits, public borrowing will surely crowd out private technology investments.

At some point, if we are to retain the lead in the global economic race, we will have to rely on our homegrown and homebound human capital for our competitive edge. Eventually, we will have to close the education gap between our competition and ourselves. Eventually, holding our lead in the global economic race depends on our ability to move up in the global education race.

Vol. 24, Issue 21, Pages 40-41, 52

Published in Print: February 2, 2005, as Education and the Economy:If We’re So Dumb, Why Are We So Rich?
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