Thursday, March 20, 2008

Generational War and Our Future Prosperity

During my recent visit to Honolulu, I was fortunate enough to meet esteemed historian Gavan Daws for coffee. I have been in email correspondence with Gavan for some years and have recommended three of his classics to you:
Prisoners of the Japanese : Pows of World War II in the Pacific
Shoal of Time: a History of the Hawaiian Islands and
Follow the Music: The Life and High Times of Elektra Records in the Great Years of American Pop Culture (co-authored with Jac Holzman). He has written a diverse array of books, many others of which you may find interesting as well.

Our free-ranging multi-hour discussion covered an astounding number of topics, but the one which struck me as the most profound was Gavan's insight into the source of national wealth. He referred to the 2006 World Bank report Where Is The Wealth Of Nations? as a key source document. In a recent email, he summarized the report thusly:

The hard evidence, worldwide, from Third to First World, is that the societies that do best by their people are those that invest in human capital, as opposed to having their people work in resource capital (digging coal) or produced capital (oil).

The 21st century is the century of human capital, worldwide.

And the hard evidence is that the best return on investment in human capital comes through education.

Gavan has put this idea into practice by launching an innovative professional music program at Honolulu Community College called MELE (the Hawaiian word for song). here is an editorial he wrote for the Honolulu Star-Bulletin: 'MELE' Hits A High Note Honolulu Community College expands skills and opportunities for the Hawaii music scene.

Hawaii's first music business courses offered at Honolulu Community College MELE program presented in partnership with Nashville's Mike Curb College of Entertainment & Music Business at Belmont University.

In a nutshell: Gavan's insight is that as the global digital revolution continues apace, music--a form of human capital in its creation, recording, distribution and marketing-- will only become easier to distribute digitally, and that Hawaii, with its rich history of musical innovation and musical talent, should be well-placed to reap the benefits of this digital development. But the key is providing young people with a solid education in the business of creating, distributing and marketing music. Hence the MELE program's connection to the music business's "ivy League" music program in Nashville.

Hawaii's political leaders have attempted over the past three decades to create centers of human capital by launching a law school, a medical school, and most recently, a medical research facility. While the efforts have certainly created new concentrations of human capital, they are competing with other similar centers for funding and talent. Their "edge" in a global sense largely flows from the attractiveness of Hawaii's climate and culture.

It is actually extremely difficult to create a self-sustaining concentration of human, financial and entrepreneural capital: Recreating Silicon Valley Not an Easy Task (Johns Hopkins University)
The two historians, who specialize in science and technology, have investigated why it is so difficult to recreate California's vital high-tech center. Silicon Valley owes its unparalleled success to an unusual interplay between corporate and university researchers and a truly unique set of circumstances, they concluded in a paper to be published next month.

"No one actually has been able to successfully replicate Silicon Valley, including the original father of Silicon Valley," said Kargon, a professor in the History of Science, Medicine and Technology Department.

Other regional high-tech centers, such as Research Triangle Park in North Carolina, attract established firms by offering low taxes and other incentives. That strategy has been successful, creating many jobs and bolstering the regional economy. But the companies are based somewhere else.

"They are not self-generated," Leslie said. "That means that it's always going to be a satellite to someplace else, where the ideas are created."

One of Silicon Valley's key ingredients of success has been a rare symbiosis between industry and university researchers, two cultures that often clash.

Even the man whose vision spawned Silicon Valley, Stanford University electrical engineer Frederick Terman, was unable to successfully copy his creation anywhere else in the United States. When he tried to duplicate Silicon Valley, Terman tended to overestimate the importance of having a particular kind of educational institution as the catalyst, while underestimating how hard it is to convince competing firms to cooperate, Leslie and Kargon said."

In other words, education is only one building block in a complex relationship with entrepreneurs, sources of venture capital, government research funding, intellectual property rights, and so on. Nonetheless, it remains a key factor.

The ills of the American educational system are well-known. Low test scores compared to other nations, half the PhDs in hard sciences are awarded to non-U.S. graduate students who we then kick out of the country in the name of "Homeland Security"--great idea, let's make it nearly impossible for the smartest, brightest people we educate to work here! That is a recipe for Homeland Insecurity, at least financially.

Various ideas are being tried to improve American education: longer school years, enrichment programs, private schools receiving public funding, No Child Left Behind which effectively closes down incompetent schools or causes new management to be hired, and so on.

I don't claim to be an expert in education, nor can I claim to know which of these ideas and innovations is actually bearing fruit. As always, the evidence in social sciences is all too easily swayed to fit the ideological biases of the researcher. If you're looking selectively for data to support your presupposition, you will find it.

Many of the causes of American youth's poor education stem from American culture: horribly unhealthy fat and sugar-heavy diets, an obsession with television and other electronic distractions, widespread drug use (prescription and illegal), two-working-parent families, one-parent families, long commutes, the generalized "dumbing down" of America, the insane disparities in school funding created by America's obsession with local school boards, the idiocies and gross financial incompetence of many of those school boards, a cultural disdain for education (at least compared to Asian nations), and so on. (This is only a partial list but you can fill in the rest.)

But we must also look at what our Federal government spends the vast majority of its revenues on--and it sure isn't education or human capital.
Let's start with The $3 trillion Dollar War (book by Joseph Stiglitz and Linda Bilmes) Linda Bilmes on Our 'Three Trillion Dollar War' (article and book excerpt)

According to Wikipedia's breakdown of the 2008 Federal budget (well-sourced), our government spent:
$1 trillion on the elderly (Social Security and Medicare)
$210 billion medical care for low-income children and families$
481 billion for National Defense (not counting Iraq and Afgan wars--they have cost $526 billion for combat operations to date) Source: Only World War II was costlier than Iraq war
$145 billion: Global War on Terror (GWOT)
$34 billion: Homeland Security (sic)
$217 billion: interest on National Debt (this is external debt; total interest paid in 2007, according to the U.S. Treasury was $430 billion; please see The Debt to the Penny and Who Holds It
$66 billion on education

Now this total for education is clearly incomplete. That's because billions in other funding end up in universities: DARPA (The Defense Advanced Research Projects Agency) research, National Science Foundation grants, etc. And most education funding is local: state, school board, etc. Add all this up and it is tens of billions beyond $66 billion.

Nonetheless, it is obvious that at the Federal level caring for the elderly and war/defense are much higher priorities than educating the young.

Before you accuse me of wanting to abandon the elderly to the wolves, please read my extensive critique of Medicare waste: Medicare Waste--50%? (January 24, 2007) and then do the math on that handy Social Security Summary you receive every year which lists exactly how much you paid into the system during your working life.

First, adjust each years' contribution for inflation with the CPI calculator, a very easy to use tool courtesy of the U.S. Labor Dept.

Now add interest you could have earned had you saved that money yourself. Be generous and give yourself 8% a year, the long-term average return of the stock market.

Total your contributions and interest in 2008 dollars, and then deduct all the money (also calculated in current dollars) you're scheduled to receive (assuming an average lifespan) in Social Security benefits.

If you are typical, you pulled out all of your inflation-adjusted contributions and all the interest you would have earned on that money in the first few years of (full benefits) retirement. Throw in your employers' contributions and all the money paid into the system by you and your employer(s) is good for around five or six years' benefits. (Results will depend on wages earned, length of working life, etc. Though many workers pass away before they get a dollar of Social Security, their survivors qualify for benefits.)

Everything beyond the paid-in money and accrued interest is "welfare," i.e. a generational transfer of wealth from current taxpayers to the elderly.

I say this as someone who is 12 years away from retiring, and who hopes to get something. But if it was means tested and I got nothing, then I'd reckon I was doing well enough not to need it.
There is no getting around this generational transfer, which was designed when the worker-to-retiree ratio was 15 to 1, not 3 to 1 as is it now.

And that raises the question: should we be subsidizing the elderly, regardless of their accumulated wealth, assets and investment earnings, or should we be devoting more of our resources to building human capital, i.e. educating our young?

As for the war: what could $3 trillion buy us in the way of advanced education to prepare our young to compete in the global marketplace? Or how about $1 trillion on education and $2 trillion on solar panels?

Generational war in the U.S. is as verboten a topic as racism. Nobody wants to question the enormous subsidies being spent on the elderly, or question if these funds should be means-tested or shared with the project of building the nation's human capital via education. But even a cursory review of the sources listed above should make us wonder if we are squandering our national treasure not just on a "war without end for oil we don't need," but on a hopelessly wasteful Medicare system and "welfare for the elderly regardless of their wealth."

The reason it matters is this: if we fail to "build" human capital, then our future prosperity is at grave risk.

As a nation, we would be well-served by assessing these Federal priorities in light of the nation's dependence on human capital for its future wealth.

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