Chapter 1 – How America Became the World’s Smartest Society – And How It Can Stay That Way
Human Capital And The Smart Society
America’s success is heavily dependent on its bedrock of political, social, and economic institutions – a free market democracy with secure personal freedoms and property rights. The real secret to its extraordinary success is human capital – the acquired and inherited personal abilities that enable an individual to be successful.
Given the indispensable role of government in generating human capital it matters a great deal how, specifically, government executes that role. Education, productivity, and immigration are a country’s human capital tripod and government has a key role to play in each. Government support of education and basic research generates enormous benefits.
Education: Huge numbers of American schoolchildren are insufficiently challenged today because of low academic expectations. This can be corrected by getting better teachers, toughening school curricular, and demanding more effort from students.
Family breakdown tremendously harms the education of children affected by it. Higher education reform must begin in high school with a better integration of high school and college curricular. Sound education reform will require colleges to refuse to admit under prepared students.
America’s colleges teach too little, cost too much, and are increasingly distracted from their primary mission. America’s generations over age 35 are the best educated in the world, but those under 35 are less well educated than those of a dozen other countries.
Productivity: Our country’s productivity is dependent on the quality of its human capital and its productive technology, which requires being in the forefront of scientific research and being able to quickly translate research findings into innovative technology for the production of goods and services. The U.S Government’s underwriting of scientific research has contributed hugely to America’s lead in technology. American inventors and scientists have been responsible for development of the world’s most important new technologies of the last 150 years. In most cases direct or indirect government subsidies played an important role. Unlike most government activities, the payoff leverage from government investments in scientific research has been enormous.
America’s workplace productivity is the highest in the world, but declining relatively, partially due to misguided public policies such as stifling regulations, high taxes, and restraints on competition.
The amount of work effort is hostage to government social support policy. The decline in labor force participation is a serious productivity drag. Policies that promote early retirement and indiscriminant authorization of disability eligibility seriously reduce work force participation, as do entitlement programs and state and local public employee contracts. Huge productivity gains can be achieved by sensibly restructuring these.
The cost of our welfare programs is directly proportional to the percentage of population severely deficient in human capital.
Immigration: A country’s immigration policy should welcome immigrants with strong human capital and avoid importing those with weak. The human capital benefit from immigration depends on the qualifications of the immigrants allowed to come by the design of a country’s immigration policy.
Throughout American history immigrants have often contributed disproportionally to America’s advances in productivity, but this is changing. How well the nation benefits from immigration depends on the design of national immigration policy. For three centuries most American immigrants were from Europe and, to a lesser extent, Asia, and they were often among the most talented and venturesome. For most of our history we had no social welfare safety net or labor protections and the immigrants had to be hardy and hard working. America was attracting the world’s best and brightest without even trying.
If America is to replicate its earlier success in attracting highly capable immigrants, it must do so through the design of its immigration quotas. The focus of immigration policy should be, not on illegal immigrants but on the type of immigrants, we should seek to admit. The overwhelming majority of our current immigrants are poorly educated and unskilled. By restructuring our immigration admissions criteria we can quickly realize an incremental human capital bonanza. By admitting hundreds of thousands of better educated, skilled English speaking immigrants, the U.S can gain an instantaneous infusion of talent. By upgrading America’s labor force today, an immigration policy that admits more capable immigrants would reinforce a virtuous human capital cycle for future generations. Immigrants who raise children in stable families and encourage high achievements in school would generate human capital outcomes much greater than those of current American immigrant children. To illustrate the downside of our current immigration flow, note that over half the children who failed to meet the goals of the NCLB Act are children of recent immigrants.
Assimilation depends on immigrants’ acceptance of American values, which persisted until the 1960’s – less so since then because of opposition from America’s intellectual elite and its leading institutions, including public schools. If we can’t restore our assimilation process our new immigrants will not be able contribute fully to America’s productivity and society. The fastest way to build America’s human capital is to admit more of the right immigrants legally under sensible, strategic admissions criteria, and to readopt our assimilation policies that were so successful for most of our history. We want to draw immigrants from the top of the talent pool instead of the bottom, as we are now doing.
Summing Up: The concrete manifestation of our human capital worries can be seen in the bitter partisan debates about inequality, welfare, and deficits, and in the failure to understand that all of these problems, and others, are really caused by the ongoing erosion of America’s human capital. Most of the things the American Left is exercised about – high unemployment, stagnant wages, rising poverty, homelessness, and diminished access to healthcare, result from the human capital deficiencies of the lower third of the population, as do the concerns of the Right – rising costs of welfare entitlements, subpar economic growth, alarming rates of out of wedlock child-bearing, and idleness and delinquency among the young. The income redistribution favored by the Left and partial dismantling of the safety net favored by the Right are both politically infeasible and economically counterproductive. We can strengthen all three legs of America’s human capital tripod by reforming American education, rebuilding the American workplace, and welcoming the most capable immigrants. All Salin’s policy recommendations meet two criteria. They do not expand the scope of government and they are not costly relative to the benefits to be gained.
Chapter 2 – American Education
The Keystone of a Smart Society
For over two centuries America had the world’s best education system and the world’s best-educated people. This is no longer true. Despite little federal government input until recently, the curricular content of American schools was relatively uniform due to the influence of national accreditation organizations, the standardized doctrines of teachers colleges, and the sales policies of textbook publishers. There was general agreement on the educational foundations to be taught for elementary education until John Dewey and other progressive educators changed the training of teachers in schools of education, and subsequently, in classrooms. There was a powerful counter-movement in the 1950’s, urging higher academic standards and more rigorous instruction. The debate continues, with the teacher-training establishment and the NEA still promoting progressivism, and many prominent critics, including John Silber and Chester Finn, advocating a return to rigorous, substantive education in key subjects.
Until the 1960s, the national consensus was that high schools should sort students by academic ability and fit each student’s course work to his capacity.
To remain the world’s best-educated country, the U.S must revamp the entire set of its educational institutions and policies from preschool through college. Over the last 5 decades America’s educational paradigm has been transformed by four major developments: 1. Recognition of relative slippage measured by international educational standards. 2. A sea change in the way professional educators felt about the need to raise the learning success of poor and minority public school students. 3. Increased reliance on testing to gauge educational progress. The newest international test is PISA. 4. The understanding that America has to revise its educational practices to remain a leader in a global knowledge economy which requires keen analytical abilities, strong mathematical and scientific proficiency, and fluent communication skills.
TFA was founded by Wendy Kopp. Her brainstorm was to recognize that the overwhelming majority of U.S teachers are being educated in second-rate institutions and that we had to break the monopoly on teacher training held by state teacher colleges. The countries that lead the world in educational outcomes have one common factor: Their teachers are better educated and better respected.
The Massachusetts Education Reform Act of 1993 imposed a rigorous statewide K-12 core curriculum and a longer school day and year. It now leads the nation in K-12 education gains.
Chapter 3 – Closing the MEGAGAP
Megagap refers to the learning gap between low income and minority students and all others. So far, the massive, multi-billion dollar initiatives attempting to address the problem of closing the Megagap have been unsuccessful. The author thinks stimulation of cognitive development in early childhood, pre-kindergarten age, can help close the gap by attempting it in pre-K schools that actually teach. The hope is that these children’s cultural literacy deficit can be closed before they enter first grade. The educational content in Head Start systems rarely succeeds in advancing learning because it’s not rigorous enough. Head Start should be ended and new experiments tried to try to improve curricular for early childhood education. Several small-scale pre-K educational experiments have showed promise. The author advocates universal preschool education once a curricular has been worked out that proves effective.
Chapter 4 – Closing the Mainstream Achievement Gap
The Mainstream Gap is the growing gap between what mainstream American youth are actually learning and, 1) what they are capable of learning, 2) what their peers in the educational leader counties are learning, and 3) what is actually expected of them in a typical U.S public school. The author thinks this gap is a lot easier to close than the Megagap, and the potential payoff is astronomically greater. From 1954 to the present, the U.S public school reform enterprise has been focused almost exclusively on closing the achievement gap separating disadvantaged, minority schoolchildren from the rest – the Megagap. Many tens of billions have been spent on this effort by the federal government, with little measurable result.
A review of the empirical evidence points to a surefire and easily implemented path to achieving strong school performance gains. All it will take is for the typical American public school districts and most particularly its high schools to demand more of their students, which will mean: 1. Accelerating the pace at which subject matter is covered, especially in grades 9-12, with more rigorous coverage of science, math, English, and history. 2. Holding students to higher performance standards through continuous testing and challenging homework. 3. Making sure that teachers are qualified to teach the subjects. 4. Issuing college preparatory high school diplomas only to those achieving passing scores on college ready exit exams.
Each of our fifty state education departments has the ability to require implementation of these new standards rapidly and consistently. We have tried smaller class sizes, diversity initiatives, and increases in school funding, along with teacher performance evaluation protocols, all without measurable success. Educational success varies widely between the states and between children from similar backgrounds. The more successful states follow most of the practices described above. Massachusetts is the clear leader. In 1993 John Silber chaired a state commission that produced a highly detailed policy document recommending big changes in K-12 educational practices, and followed up by ensuring that these practices were executed in the schools. The Massachusetts Education Reform Act of 1993 had a number of reform initiatives of which four were key: 1. Requirement that all state school districts have rigorous curriculum specifications with detailed lesson plans for all key subjects in every grade. 2. A new statewide diagnostic testing protocol to ensure that students achieve proficiency in the new curriculum standards. 3. More rigorous testing of new teacher candidates to ensure mastery of subject matter. 4. Statewide uniform high school graduation standards requiring that all students take and pass a comprehensive multi-subject MCAS test battery to get a diploma. Tremendous improvement in educational outcomes in key subjects was achieved over a fifteen year period from 1998-2012.
The Common Core State Standards Initiative (CCSI) commits its 45 enlisted states to stringent English and Math standards from 1-12th grades. Fordham has rated these standards as good, but not great. Chester Finn and Michael Petrilli say standards are the foundation and should guide state assessments, accountability systems, teacher preparation, licensing, curricular, textbooks, etc. The standards need further improvement and standards should be added for Social Sciences, History, and Physical Sciences. States will need to revise their classroom lesson plans, textbooks, and teacher training. Half the teachers now in public education have not mastered the material required to meet the standards.
Curriculum reform is one of the most easily replicable ways of closing the Mainstream learning gap. Even with their shortcomings, CCSI standards are a vast improvement over what most states currently teach. Accountability based education reform depends on being able to measure achievement and providing incentives for it. States are now required to give national NAEP Math and LEA tests to students. The nation’s best educational accountability test is the MCAS (Massachusetts Comprehensive Assessment System). It is much better than NCLB. MCAS tests in Biology, Chemistry, Physics, Engineering Technology, History, and Social Science and it is aligned with that states curriculum standards. In the Massachusetts case, teaching to the test is good because the test was designed to fit the curriculum rather than having the curriculum designed to fit the test.
The MCAS is the linchpin because its tests follow the curriculum and the teachers are motivated to adhere to the standards and, since passing the MCAS test is a condition for graduating from high school, Massachusetts graduates are this country’s students best prepared for college.
Teacher training: To do the job we have to know how to train and identify good teachers. Good schools require attracting highly capable individuals into teaching, making sure that they have mastered the subjects they will teach, and appropriately awarding the better teachers while terminating the poor teachers. None of this is being done now on any wide scale. At the root of our teaching training and recruiting problem is the monopoly of the second-class, formal teacher education programs in place today. Since our best American universities mostly avoid teacher training most teachers are trained in second tier institutions. Most are exceedingly mediocre in both scholastic aptitude of students and scholarship of faculty. American public school teacher preparation is thoroughly inadequate. Two thirds of the typical teacher education curriculum consists of pedagogy courses that attempt to train teacher trainees how to teach. These don’t help people learn how to teach and so much time is wasted on them in teacher colleges that the trainees don’t spend enough time learning the subjects they’re going to teach. The prejudices of the nation’s leading accrediting organization (NCATE) have been a formidable block to obtaining good teachers, but it does seem to be improving its standards.
States play two critical roles in shaping the quality of their teachers – the requirements they impose for certification and the rigor of the certification exams. The requirements have been too rigid in their specifications of required teaching courses, repelling the most talented prospects, and the certification exams are too easy, allowing many of the least talented graduates to be certified.
Widespread alternative certification is required if we are to get large numbers of good new teachers.
The best hope for getting large numbers of new teachers quickly is an expansion of the Teach for America model where prospects are tested for subject mastery, given an overview of the best pedagogical techniques, and tested in the classroom, thus avoiding altogether attendance at a teachers college.
High school Graduation Requirements: The most pervasive failing of American high schools is their inability to adequately prepare their graduates for college level work. The gold standard is the MCAS exit exam, which measure college level ability in Math, ELA, the key sciences, History, and Social Sciences as a condition for graduating. Most states use tests that do not adequately test for college readiness. The best approach for states is to replace current exit exams (for high school graduation) with either the SAT or the ACT. Eleven states are considering this. If students had to meet a properly set benchmark on these tests it would be a powerful motivator for educators and students. To be properly prepared for college, high school students must take enough of the right courses. The importance of rigorous high school curriculum design is beyond question.
School Choice: Because of the power of teachers unions and the educational establishment, the fastest way to achieve reforms is by doing them in schools outside the control of the educational establishment – Charter schools, etc. It’s time to stop seeing Charter schools as just being for Megagap children and start building them in mainstream communities where they could actually electrify academic achievement if their curricula is properly designed and they get good teachers. It’s much easier to do this in Charter schools than in regular district schools.
Summing Up: Focusing on closing America’s Mainstream Learning Gap is by far the easiest and best way to advance American education. For six decades we devoted the lion’s share of educational reform efforts to closing the country’s educational Megagap with little to show for it. The effort has distracted reformers from tackling, or even acknowledging, the Mainstream gap which Massachusetts has proven can be closed. Students will only learn as much as they’re expected to learn, so raising expectations will lead to better results.
Five proven steps:
1. Following a more rigorous curriculum in all key subjects in every grade.
2. A regimen of testing in school accountability.
3. Recruiting more capable and better-trained teachers.
4. Requiring high school graduation exit exams aligned with college expectations.
5. Offering mainstream students a choice of schools.
In hindsight, the fallacy of putting most of our educational reform effort into trying to better educate those students most difficult to educate, instead of putting the most effort into better educating the children most capable of benefiting from rigorous education, is obvious.
Chapter 5 – Making College Pay Off
U.S higher education made a quantum leap with the Morrill Act of 1862, which established the Land Grant Colleges, and another with the GI Bill after WWII.
There are more institutions of higher education per capita in the U.S and they are far more varied than in any other country. The worst problems are not in higher education but in the deficiency of American high schools, which deficiency requires colleges to devote enormous resources to largely unsuccessful efforts at remediation. Too many American colleges and universities give teaching short shrift except in the professional and technical specialties, which train their graduates well. It’s the liberal arts and sciences that have become a wasteland. It is only in some selective liberal arts colleges where general education is given high priority. Elite research universities, both public and private, recruit, tenure, and promote their full time faculty based almost entirely on the volume and quality of their research, leaving most undergraduate teaching to inexperienced Ph.D. students. Community colleges depend heavily on part-time faculty for most teaching. The only higher education institutions that hire and retain full time faculty primarily to teach are small, private liberal arts colleges and mid-sized state colleges, but even there they have altered and weakened the content of their liberal arts and sciences courses. The key to effective teaching and learning in college must rest on high academic standards, rigorous curriculum, test based student evaluation, and faculty who are proficient in their subjects and have enough time to meet with their students and to evaluate their work.
Federal student aid is poorly allocated for either raising college academic standards or for lightening student financial burdens. The tuition inflation resulting from federal financial aid is spent on underwriting faculty research, professional specializations, massive cross-subsidization of needier students, wasteful indifference to the cost of personnel, and building construction sprees. As the former Provost of The State University of New York, the largest unified system of higher education in the Country, with sixty four campuses ranging from community to technical colleges, to small liberal arts colleges and respected research universities, Salins knows what it costs to deliver a quality education. With well-credentialed, full time faculty, in small classes, on attractive, amenity laden campuses, the total cost, excluding room and board, should come to around $16,000 per student. What’s actually spent at most colleges of this caliber now is between $25,000 and $37,000 per student per year. The fact is that college is nowhere near as costly as it is made out to be.
The American higher education system is still in pretty good shape by many standards; unlike our lower education system, it’s not a government monopoly and it is marvelously adaptive to the wide range of cognitive abilities and occupational interests of its students.
There are four generic problems and they’re getting worse as student selectivity has declined. Colleges admit too many unprepared students, invest too little in undergraduate instruction, are too little concerned with graduation rates, and their financing is so erratic that millions of qualified students do not go to college, and those that do are overly burdened with debt.
The most easily corrected problem is the misalignment between the academic preparation needed for college and the instructional standards of American high schools. All but the most elite colleges deal with this problem by investing heavily in remedial courses. Less than a quarter of students taking these courses are successful in completing college. Experience has proven this remedial course investment as a flawed concept. What is needed is to thoroughly align high school curricular with college expectations. Colleges should be directly involved in determining what is to be covered in high school. The Common Core state standards are a step in this direction. The American collegiate establishment represented by eight key organizations should take the lead in setting the standards and ensuring that they are implemented in the high schools. These eight organization are as follows: The American Association of State Colleges and Universities (AASCU), The American Council of Education (ACE), The American Council of Trustees and Alumni (ACTA), The American Association of University Professors (AAUP), The Association of American Colleges and Universities (AAC&U), The Association of American Universities (AAU), The Association of Governing Boards of Universities of Colleges (AGB), and The Association of Public and Land Grant Universities (APLU).
The other effective action colleges could take is to not admit students graduated from high school without a proven college-ready academic diploma. The states need to mandate regular exit exams for high school graduates and give academic diplomas only to those sufficiently prepared for college. Until this happens colleges should rely on national SAT or ACT entrance exams and not admit students falling below appropriate thresholds. Colleges that raise their academic admissions standards will see sharply higher graduation rates.
Another major weakness of American higher education is failure to use high quality instructors to teach freshmen and sophomores. Most colleges are indifferent to which pre-major liberal arts and sciences courses freshmen and sophomores elect to take, and to the faculty that determines the content of such courses. The organized faculty fiercely guards their prerogative of being the only ones to decide what is being taught, though they readily acquiesce on curricular matters when imposed by outside accreditors. Since a strong general education foundation is highly beneficial in promoting a greater mastery of complex material and a greater maturity in decision-making, as well as a greater understanding of all aspects of life; cultural, scientific, and civic, this indifference is a very serious weakness. Colleges and universities conserve their resources to pay for the more expensive upper level course work and cheat their freshmen and sophomores by placing them in classes taught by adjunct faculty and graduate students. Given how important the first two years of college are, this is scandalous.
Millions of talented Americans don’t go to college, go to an inferior institution, or fail to graduate. This can be remedied by changing the structure of financial aid. All qualified high school graduates should have access to low interest loans for college. There should be no family means-testing and interest rates should be low, and financial aid denied to poorly qualified students. The value of the federal loans should be about half the cost since states already underwrite about half. Interest rates should be set at the government’s cost of borrowing plus administrative cost, and repayment of fifty percent of the loan should be forgiven for students who graduate on time with grades above benchmark standards. Loans would be approved only for qualified institutions where student performances on nationally normed exams met the benchmarks. This would make colleges more focused on the quality of undergraduate instruction and on the quality of the applicants they accept. Last year federal aid to college students was over $140 billion of which a hundred billion was loans. The author does not want federal intrusion into college affairs, except through financing student tuition, which can be leveraged by designing the funding to increase access for qualified high school graduates, and by motivating colleges to improve their quality of undergraduate instruction. As an additional incentive for colleges to do a better job of culling unqualified applicants and of educating those they matriculate, colleges that fail to meet certain benchmarks should be required to underwrite and guarantee a portion of federal student loans to their students.
Chapter 6 – The High Technology Work Place
The most important ingredient of a smart work place is advanced technology, which depends on being at the frontier of science, since all technology is grounded in scientific discovery. Science and technology has become so advanced that further progress requires substantial investment in scientific research, both basic and applied. Expenditure on science research is worth the outlay many times over. Cutting-edge scientific research is the indispensable prerequisite for the development of technologically smart workplaces. American science is such a large part of the worldwide total that it acts as a critical feeder and spur to the research effort of other countries. But if the U.S is to remain at the global scientific frontier, the volume of American research must grow faster than the American economy. The share of U.S governments support for research has actually fallen over the last four decades and the private share has grown. The free market leads to the most efficient allocation of resources and government involvement can easily lead to misallocation of resources.
Basic scientific research generates massive social benefits, far beyond any that a company making the research investment could recapture, so it’s critical that government has significant investment in basic scientific research. The payoff from the government’s investment in development of the Internet is one of the more obvious examples of benefits derived that are astronomically greater than the cost. After WWII scientific research in the U.S grew exponentially, driven primarily by government spending. In 2010 total U.S research costs about $366 billion, 31% from the government. Almost all American research is conducted by non-federal, usually non-governmental organizations. Corporations accounted for $251 billion, 88% self-funded. Most of the rest took place in American Universities. The private sector’s research effort is focused primarily on patentable inventions developed through applied research which is dependent on underlying basic or pure research. Of the $70 billion spent on basic research in 2010, more than half came from the federal government. Around 60% of federal government research is devoted to basic research. Private sponsors of basic research could not justify the expenditures because there are few immediate economic benefits from basic research. That’s the rational for the federal government to fund it. Most federally funded basic research is conducted by universities. Their grant applications are reviewed by external panels of distinguished scientists. The National Institutes of Health (NIA), National Science Foundation (NSF), and The Department of Defense account for 91% of federal government research funding. Rapid innovation depends on a strong system of intellectual property rights, i.e., good patent law. The proper functioning of the U.S patent system is a critical issue because property rights are at the foundation of America’s lead in innovation. The U.S Patent Office (USPTO) is effectively the gatekeeper of innovation. The USPTO plays a critical role in support of American technical innovation. The chief battleground in today’s patent wars is information technology. The Bayh-Dole Act in 1980 allowed universities to patent their research. Following passage basic research expenditures of universities have grown exponentially. The U.S still has unmatched advantage in scientific research. We still do more of it and do it more efficiently than anywhere else, leading to the rapid adoption of science driven technological innovations. No government activity rivals research funding in terms of bang for the buck accruing to the national benefit. High levels of basic research will only occur if the federal government funds them.
Patent trolling wastes billions of dollars and the cost of frivolous patent lawsuits should be raised to deter this activity. Also, USPTO should be authorized to investigate and invalidate devious patents acquired by patent trolls to blackmail technology startups.
The research credit should be made permanent. It’s one of the single most beneficial corporate tax incentives. As a percentage of GDP, federal outlays for basic research amount to .02%. 65% of this goes to NIH, 15% NSF, and 7% to DARPA. Federal research spending should be tied to GDP and raised over time to .04%. A predictable funding stream for university research labs would make them more productive.
Chapter 7 – Ending Idleness
Idleness is a big waste of human capital, but many current labor market policies discourage work. For most of our history, government policies have reinforced the work ethic, but the percentage of men working has gone from 84% in 1950 to 68% today. America’s positive work ethic has been systematically undermined over the last five decades by a variety of shortsighted policies – welfare programs, political pressure from organized labor, relaxation of disability eligibility criteria, unemployment insurance, premature early retirement subsidies, etc. Increasingly, individuals are paid not to work. We’ve started to incentivize idleness. Full employment will require reconfiguring government labor market policy into one that recognizes that work builds human capital. Work related safety-net entitlements in particular need to be re-configured. Europe’s richer countries have seen their work effort plummet due to their welfare state culture, including: 1. Rules governing working time negotiated through collective bargaining or mandated. 2. Generous unemployment and pension benefits. 3. A high minimum wage. 4. High marginal income tax rates to pay for generous welfare state benefits.
Because the influence of unions depends on levels of unionization they have much greater success in promoting work less policies in Europe, where unionization is high, than in the U.S, where it is low. Welfare-state policies, in their comprehensiveness and work depressing effects, correlate with the extent of unionization. 18% of the American labor force is unionized, whereas it’s over 90% in Austria, France, and Germany. Work retarding policies are proportional to the extent of union influence – collective bargaining power and political muscle. No amount of union pressure can make employers pay workers more than they’re worth for long. When they have too much political power unions inevitably make the overall workforce poorer – squandering vast amounts of human capital. People not well versed in economics often believe that employment for some comes at the expense of unemployment for others – “The fixed lump of labor fallacy”. Many governments, and labor unions everywhere, are still in thrall to the fallacy. Another fashionable fallacy holds that higher levels of employment are no longer possible because of a new structural economic and labor market dynamic. This is nonsense. The American economy will always be able to absorb its labor force. The only true limitation on total national employment is total national willingness to work. This is true because there’s no limit to human material needs or wants. Throughout history labor has become more efficient and trade has expanded without causing great unemployment. Workers displaced by technology or trade get jobs producing the next wave of goods and services.
There will never be a shortage of jobs in the U.S, or anywhere else where economies are well managed. Two pervasive sets of policies keep Americans from working; those that provide income to working age people who are not working – disability and unemployment insurance – and those that encourage early retirement – Social Security, Medicare, and state and local public employee pensions. Simple reforms could trigger a quantum increase in the level of labor participation and employment. The most successful domestic policy transformation of the last half century was the 1996 Welfare Reform. It is a model to emulate. The caseload went from 12.6 million people down to 4 million in sixteen years. Charles Murray’s, Losing Ground, was a catalyst for this reform. The states succeeded because they would lose federal funding if they didn’t. What most states did was to hire welfare-to-work contractors and condition the contracts on successful job placement. Most were private, for profit firms. The success of these contractors contrasts with the dismal record of decades of federal job training programs.
Between 1970 and 2011, U.S labor force grew by 85% and disability rose by 474%, to 6.5% of the total work force. The disability rate has almost doubled since the year 2000. The dramatic increase in disability applications has been fostered by compliant doctors and caseworkers. The DI laws to screen out unjustified claims are not being enforced. The 1984 liberalization of disability insurance vastly increased the subjectivity of disability screening. As the criteria for receiving disability loosened, applications exploded. In 2012, disability payments were at $140 billion. This cost is only about 2/3rds of the total disability cost because they qualify for Medicare after 24 months, another nearly $80 billion per year. The impact of this program on labor force participation has been substantial. We can reduce disability rolls by setting specific numeric targets and encouraging the engagement of welfare to work contractors, with payment contingent on successful placements. The Social Security Administration can also more strictly enforce the eligibility criteria that are on the books. The Agency can be authorized to conduct independent medical evaluations of all disability insurance claims. Partial disability payments for those who go back to work are a good idea. Unemployment insurance, along with food stamps and Medicaid, can raise the minimum wage that workers will accept. The challenge is to take the funds that government now spends underwriting idleness to subsidize work instead. The goal is to transition to a re-employment program. Human capital degrades over time without use.
The average annual Social Security benefit is $15,000 a year, $646 billion total. The program encourages millions of able, young elderly Americans to stop working. The trick is to get potential retirees to keep working by making it pay off financially. The typical internal rate of return for potential retirees that work extra years is actually negative. A modest increase in the delayed retirement credit coupled with elimination of the age 70 cap on benefit increases should provide a strong incentive to continue working. We should also scale back the option of early retirement at age 62.
Delaying Retirement – State and Local Workers: State and local workers pension plans are usually defined benefit plans and they permit retirement after a specified number of years. They can no longer be afforded, bankrupting some sponsors, and in all cases diverting public revenues that could be better used on other functions. The structure of these pensions causes a terrific waste of human capital because of the early retirement they encourage. The policy fix that can both motivate state and local employees to work to normal retirement age, and stabilize state and local government budgets, is to switch from defined benefit plans to defined contribution plans similar to 401K’s. This is furiously resisted by public employee unions, but the defined benefit model has become obsolete and it will have to change.
The Federal Government’s disability, unemployment insurance, and old age pension programs are mostly structured in ways that discourage employment and motivate potential workers to rely on public assistance instead. Getting this right so as to maximize incentives to work is crucial to maintaining America’s competitive edge.
Chapter 8 – Importing Smart Americans
The U.S has led the world in both importing immigrants that improved its human capital stock and in assimilating them so they become fully Americanized. It is unique in the world in the way it has assimilated immigrants due to its heritage of civic values shaped by our founding documents. American assimilation owes its power to four unique aspects of American society: 1. The ideas embedded in the U.S Constitution. 2. An economy built on market capitalism. 3. America’s governmental, political, religious, social, economic and philanthropic structure. 4. A commitment to progress.
For the past few decades, immigrant assimilation has been systemically undermined by a currently fashionable, but misguided ethos, multiculturalism, which fosters ethnic particularism hostile to assimilation. Immigrants’ children’s English proficiency depends on what happens in America’s schools and it’s critical that they are immersed in English there.
Our refusal to admit thousands of European Jews in the years immediately preceding WWII was a tragically missed opportunity to elevate our intellectual human capital. Under current immigration laws, employment based immigration is the least favored category, accounting for just 14%. Before 1965, because of the difficulty of immigration, it was mostly the most industrious and the smartest who came here, so the U.S attracted the world’s best and brightest immigrants without even trying. A radical change in immigration policy produced by the 1965 Immigration Reform, along with other factors, has resulted in a rapid deterioration in the quality of our immigrants. We have never fully laid out any sensible, coherent, alternative admissions criteria. Current law is heavily weighted toward favoring family reunification.
The extent to which a country benefits from immigration is dependent on the contours of immigration policy. There are at least 6 admissions criteria to consider:
1. Education and skills. The first and surest way to raise America’s stock of human capital is by importing highly skilled, intelligent, responsible, diligent immigrants. The children of this type immigrant are far more likely to succeed in school and develop valuable skills themselves, and to assimilate by accepting America’s best values.
2. Fluency in English. This greatly accelerates assimilation and should be made an admissions criteria.
3. Work Experience.
4. Willingness to work at jobs that Americans no longer want to do. There are serious downsides to importing large numbers of this type of immigrant. They usually can’t speak English, have greater difficulty functioning in the community, take more time to assimilate, and may become indigent. What happens to the children is even more important. They often are influenced by delinquent peers, do badly in school, and get in trouble with the law. These type children quickly assimilate to the worst behaviors of their American friends and quickly lose their parents strong work ethic. The problems associated with this type of immigrant more than cancel out the benefit of the work done, so we need to reexamine the premise. There are many ways an educated and skilled labor force can get its low-end work done. Much of it can be done with improved technology and mechanization, and the rest by paying more for the jobs. All these jobs that Americans don’t want will be filled by Americans if the pay is raised enough to attract them. This can be made more affordable if welfare type subsidies are restructured to encourage low pay work. The lesson here is that quotas for low-end workers should be kept to a minimum.
5. Family ties. Family reunification quotas should be scaled back to immediate family members.
We should allow self-sponsorship of qualified immigrants. It is already a feature of Canada’s successful immigration law. Educated, skilled, experienced immigrants should be allowed to apply directly, without a sponsor.
What to do about illegal immigration: Illegal immigration is due mainly to the inability or unwillingness of the federal government to keep employees from hiring illegals. From the human capital perspective, future illegal immigration should be barred because they have low human capital, and allowing massive numbers of them makes a mockery of our legal immigration quotas. An immigration policy geared to maximizing human capital has to be based on human capital considerations. 60% of Canada’s immigrants are admitted because of superior education or skills, 27% on family ties. Canada has a merit point system far more rationally designed than that in S.744. Canada has no underclass of temporary or seasonal workers in its immigration criteria to appease a particular industry or interest group. Among recent Canadian immigrants, 55% have college degrees, 82% speak English well, their household incomes exceed $50,000, and over 70% become citizens. Among current legal U.S immigrants, only 26% have completed college, 47% speak English well, household incomes average under $40,000, and only 40% seek citizenship. (Surprisingly, Salins has misread some of the more important parts of S.744 and thinks the law is far more weighted toward encouraging skilled immigration than it is.)
Summing Up – The benefits of immigration depend hugely on the contours of national immigration policy. If we want to attract highly capable immigrants we must rewrite our laws to encourage them. We need to redirect immigration away from family sponsored relatives toward educated, skilled, English speaking, self-sponsored immigrants.
Chapter 9 – Getting It Done
America has always devoted more resources to developing human capital and distributing it more broadly than any other country. Government policies are already determinative in each area of America’s human capital tripod – education, work place, and immigration. We need changes in the policies – not more government involvement. Head Start has failed because it has been run as a social service program by social service agencies rather than as an early education program for instilling cultural literacy. The author thinks a pre-K early childhood educational enrichment program run by the local school districts, tying it into their K-12 curriculum, might be hugely beneficial, but admits it’ll take a good bit of experimentation to find out.
Summary of Chapter 4: Closing the Mainstream Learning Gap – This will require four reforms: 1. Institute rigorous academic curriculum for each grade consistent with the best standards. 2. Ensure that students are mastering the curriculum by instituting a program of feedback and continuous grade-by-grade testing. 3. Hire teachers knowledgeable in the subjects they teach. 4. Offer high school diplomas only to those graduates shown to be capable of doing college level work. The Common Core State Standards Initiative (CCSI) is a big improvement over current curricula standards, but it needs to be used to raise the performance of mainstream students, not just the left behind. None of this will work without reforming teacher training and raising the quality of prospective teacher applicants. To reform teacher training, we should rely on selective liberal arts colleges, with subsequent on the job pedagogy training, rather than on traditional teachers colleges. Massachusetts curricula standards are better than CCSI. The promotion of aggressive school reform by many leading Democrats in defiance of teachers unions and other traditional liberal constituencies indicates a growing convergence with long held conservative education policy views.
Summary of Chapter 5: Making College Pay Off
Though America has the world’s best higher education system, it has five serious deficiencies. Too many capable students can’t afford it. Too many academically unprepared are going. Too many colleges shortchange instruction in the arts and sciences, especially for freshmen and sophomores. Too many students are too heavily burdened with debt. Government financial aid to education can be a powerful lever to ameliorate all five problems.
Recommendations: 1. Make College affordable for all academically prepared students with low interest loans. 2. To motivate high schools to adequately prepare students for college, condition financial aid on college readiness. 3. To motivate both students and college administrators, wave a portion of the loan for students who graduate on time. 4. To motivate colleges to take undergraduate instruction more seriously limit eligibility for student aid to those that do it well. A reform agenda for higher education tied to federal student financial aid is a promising idea.
Chapter 6: High Technology Workplace Recommendations
1. Make the corporate research tax credit more generous and permanent. 2. To promote basic research at American universities set the level of federal support for basic research at a fixed percent of GDP of roughly double what it is now. 3. Clear the patent backlog. 4. Weaken the incentives for patent trolls.
These recommendations do not have politically powerful opponents. The problem is they lack politically powerful constituencies.
Chapter 7: Ending Idleness Recommendations
1. Make disability insurance standards more rigorous and enforce them better. 2. Keep all workers who are not seriously disabled employed in jobs suitable to their disability. 3. Use unemployment insurance funds to underwrite re-employment. 4. Change Social Security rules to make delayed retirement more profitable. 5. Place all new state and local employees in defined contribution pension plans.
Every one of these proposals would save many billions. Just reforming disability insurance would pay for every other recommendation in the book several times over. State and local pension reform will in many cases make the difference between bankruptcy and fiscal solvency. The biggest financial benefits will accrue to the
workers.
Chapter 8: Importing Smart Americans Recommendations
1. Greatly increase the quotas for educated and skilled immigrants. 2. Minimize quotas for unskilled immigrants. 3. Allow qualified immigrants to sponsor themselves. 4. Rigorously enforce border security and minimize employment of illegals with mandatory E-Verify and practical penalties. 5. Rationally deal with illegal immigrants. 6. Foster assimilation of immigrants by promoting English proficiency and American values.
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