Despite our stunning past accomplishments in generating human capital, the United States today can ill afford to rest on its laurels. Unless we rapidly revitalize our human capital capabilities we are not only in danger of seeing a growing roster of other countries overtaking us, but we also risk cheating future American generations of staggering levels of opportunity and economic prosperity. One recently published estimate of the “growth dividend” gained by upgrading American human capital (in this case through improved education) is $77 trillion over the next eighty years.5
Let me explain the title of this book. This book focuses entirely on America’s human capital, why we should be worried about it, and how, with some strategic shifts in public policy, we can ensure that coming generations will accrue enough of it. Yet “human capital,” a term first coined by the English economist Arthur Pigou in 1928, is jargon to the average reader, and is poorly understood by all but professional economists. Because it is the subject of the book, I cannot help but use the term, but I also want to cast its essence in layman’s language. Hence my formulation of the “smart society.” Just as individuals can be “smart” (not just in having a high IQ, but in any number of other functional or social ways), so can a country. Thus, I reserve the appellation “smart society” for a country where a majority of its citizens, and not just a privileged elite, possess high levels of human capital and, as will be explained later, put it to productive use. Throughout recorded history, the world’s richer and more successful countries have been, to a greater or lesser degree, “smart” societies; for nearly two hundred years, the United States has been—quite intentionally—the world’s “smartest.”6
How important is human capital? Being a smart society confers huge benefits. The most obvious is material well-being (see table 1.1). Americans have long enjoyed the world’s highest standard of living, however one may want to measure it. Even when compared to affluent nations in Europe and other high-income English-speaking countries (Canada, Australia, New Zealand), Americans always have had more to eat, were the first to have electricity in their homes and streets, the first to have universal telephone service, the first to have universal car ownership, and the first to travel extensively by air. Americans have long had the world’s most spacious and well-equipped homes and highest rate of homeownership. In the last few decades they were the first to enjoy the fruits of the late-twentieth-century technological revolution—computers at home and at work, large-screen and high-definition television, and electronic gadgetry of all kinds.
Rewarding as material well-being is, the more ephemeral benefits of being members of a smart society are just as important: the ability to participate responsibly as voters and officeholders in a robust democracy; the sense of personal fulfillment that comes from having a good education and occupational skills; knowledge of other people and societies that breeds tolerance of diversity and facilitates successful social interaction; the capacity to enjoy fine literature, art, and music; the possession of habits of delayed gratification and self-discipline that lead to better life decisions and happier families—to name just a few.
Table 1.1
GDP Per Capita ($U.S.)—Historical by Country
Source: Angus Maddison, Monitoring the World Economy: 1820–1992 (Paris: Organisation for Economic Co-operation and Development [OECD], Development Centre Series, 1995), and current data from the OECD.
*1870–1973 figures in 1990 $U.S.; 2011 in 2011 $U.S.
Living in a human capital–rich society also confers benefits on the community as a whole. For starters, there is the issue of society-wide financial burdens. Every rich country has long ago instituted “safety-net” programs to provide for its poor, elderly, disabled, and other unfortunates. Many of the richer ones—including the United States and the countries of northern Europe—have also added other costly public “entitlements” for the not-so-poor. There is absolutely no question that the total cost of these programs is directly proportional to the percentage of the population with severely deficient human capital: the un- or poorly schooled, the jobless and the sick (because good health is also correlated with levels of human capital). By one estimate, federal and state governments in the United States today spend about 1 trillion dollars annually on such programs—not counting Social Security, Medicare, and unemployment insurance. Aside from financial considerations, we are all happier if our neighbors, our fellow workers, our children’s classmates, and even the strangers we see in the street every day are well-off.
THE HUMAN-CAPITAL TRIPOD
What constitutes human capital, and how is it created?
Education All economists would agree that education is the single most important determinant of any person’s human capital; thus a country’s human capital will be largely proportional to the educational attainment of its adult population. This means that, for any country, the more years of education or training its people have and the more uniformly education is distributed, the greater its human-capital endowment will be. Maximizing a country’s educational potential requires establishing a national network of schools, universities, and other training facilities that are broadly accessible to the population without regard to income, and whose instructional programs meet the highest standard of the age.
However, economists specializing in the formation of human capital recognize there is more to it than education alone.7
Productivity The human-capital potential conferred by institutions of formal education during the early twelve to twenty years of a person’s life is only realized when it is translated into productivity in a workplace. A country’s productivity is determined by two factors. First, the actual output of workers depends on the tools and technology they have to work with. A well-educated workforce harnessed to primitive technology produces little. Therefore, a country’s total annual productivity also depends on the quality of its productive technology. That, in turn, depends increasingly on a country’s being at the forefront of scientific research and being able to quickly translate research findings into innovative technology for the production of goods and services.
Second, quite obvious when you think about it, but not sufficiently appreciated in practice, is that, to be productive, people have to be working—regardless of their educational endowments. A person’s productivity if he or she is not working is zero. Projected nationally, this means that a country’s total annual productivity is proportional to the number of hours per year that its adults are working.
Immigration Finally, not all human capital needs to be created at home; it can be imported from abroad by welcoming immigrants with strong endowments of human capital. Expanding a country’s human capital through immigration is a no-lose proposition. If immigrants are educated or skilled, the country gains a human-capital windfall without having to pay for it through the costly educational system. If immigrants have less education or fewer skills, the country still gains valuable human capital because immigrants generally possess a more robust work ethic than native workers. As a bonus, immigrants generally arrive with strong family values, and strong families generate higher levels of human capital in the next generation.
Throughout this book, I refer to this mix of policies responsible for the volume and quality of America’s human capital—education, productivity, and immigration—as the country’s human-capital tripod.
THE ROLE OF GOVERNMENT
Who makes human-capital decisions and who pays for it? Obviously, since human capital is a personal attribute, individuals must decide to acquire or use it or, in the case of immigration, decide to leave their homeland. Yet, government plays an indispensable role.
Take