Larry Katz on the Real Reason Education is the Key to Economic Growth

By Bo Cutter |

The expansion of the American education system produced 100 years of economic growth, but we need a new model to achieve a sustainable, equitable future.

The Next American Economy breakfast seminars resumed last week with a discussion with Professor Larry Katz focusing on his and Professor Claudia Goldin’s book, The Race Between Education and Technology. If you haven’t read this book, there is a great deal about our economy you won’t understand. If you don’t read at least the introduction now that you’ve been told, shame on you.

Larry has several fundamental insights. (These are the ones I picked out; he might prefer to highlight others.)

First, at a minimum, 25 percent of our productivity growth — and therefore our economic growth — over the 100 years between 1870 and 1970 is due directly to increases in the average number of years of education of the American people. It is highly likely that the actual contribution of education is significantly greater; 25 percent is a minimum.

Second, during this period, economic growth was high and equality actually improved in America despite fundamental economic and technological change — change every bit as great as the changes we have seen in the last 30 years. In other words, we have been here before. We dealt with the effects of technological change in the past through advances in education. There is no obvious reason we could not do so again.

Third, the fundamental educational change during this period was “the high school movement,” a grassroots-driven movement that saw free, gender-neutral access to high school as critical to community success. 

Fourth, there has been no recent educational revolution similar in scope to the high school movement, and the big change that has occurred — the growth of post-secondary education — has not been free. Not coincidentally, the growth of educational attainment in America has slowed, economic growth has slowed, and inequality has risen. 

Finally, this slowdown in education is probably a more important factor in the stunning rise in inequality we’ve seen than the shift of income toward the top 1 percent, which has grabbed more of the headlines.

Based on this discussion with Larry, I conclude that the mantra of the next successful political movement in America should be sustainable, equitable growth, and that this is a plausible goal. 

I’ll go further. A long period of relatively high economic growth is within our reach starting in a couple of years if we would get out of our own way. I’ve written a piece on this titled “An American Renaissance,” which I’ll send to anyone who asks.

But this is not a layup. If we are to grow more rapidly over the next 20 years than we did on the last 20, we have to have a productivity revolution. More of our growth will have to come from productivity — about 80 percent in the next decade, as opposed to 35 percent to 50 percent in the last three decades. To keep growth constant with the last 3 decades, labor productivity will have to grow by about one-third. If none of this happens, the generation born during the last decade will experience about 60 percent of the per capita income growth as did the generation born in the ’60s.

The single most important thing we could do to increase the rate of growth of productivity is to increase the level of educational attainment of Americans. But sustainable, equitable growth is not a goal either of our current parties cares much about. The current progressive movement’s singular focus on income distribution is both misplaced and convenient. Misplaced because there are better, more available paths to take that would accomplish both more equity and more growth; convenient because this focus enables it to ignore all the real issues. The right’s obsession with unfettered markets is even more nuts and completely ignores the economic history of how American growth actually happened.

A true next American revolution in education will not be a simple linear extension of our current system. It will involve a combination of lifelong learning and certification, a commitment to teaching students how to learn continually, an equally deep commitment to what Larry Katz calls contextual training, a renovation and invigoration of our community college system, the use of the web in unique, student-oriented, and user-friendly ways, and major long-term costs. I would guess $50 to $75 billion annually for a long time — between one-third and one-half a percent of GDP.

 But our current plan, of course, is to do nothing meaningful. As I’ve said before, the two parties are on a course to gut most of the government in order to protect the entitlements and retain the worst features of our current tax system. As an example, the total of all of the non-personnel investments in the federal budget is now $310 billion, or 8 percent of the total federal budget and slightly less than 2 percent of GDP, and it will fall to $270 billion, or 5 percent of the total budget and about 1.5 percent of GDP, over the next 10 years. This is a plan to build a low-growth, unsustainable economy with growing inequality.

Not to belabor a point I’ve probably made too frequently, but the door is wide open for what one might call a new progressivism or a new conservative movement. The old right can then focus on its Brigadoon-like vision of a time when the market roamed free and unfettered. The old left can focus on income distribution. And the real work of building a workable society based on sustainable and equitable growth can be carried out by whoever decides to reach first for the prize.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

 

School classroom image via Shutterstock.com.

Bowman Cutter is a Senior Fellow and Director of the Next American Economy Project at the Roosevelt Institute. His current work focuses on how emerging technologies are changing the nature of work and the economic system.