Education Externalities: Human Capital Spillovers
Saint Thomas Academy
Mendota Heights, MN
In the past, the United States has enjoyed periods of robust economic growth (1950s, 90s)—but can that growth be reached again? Over the past decade, American GDP growth has slowed, and the latest economic recovery has been weaker than many expected. Some economists believe we have entered an era of permanent “secular stagnation.” Others assert that we are simply running out of impactful innovations that would spur growth. Despite these gloomy forecasts, America can grow like it once did through education: utilization of human capital would equip the workforce for the modern era and create spillover in many sectors.
Investment in human capital is not necessarily a magic bullet for an economic boom, but it is the most likely path towards the acceleration of GDP growth. Production in the developed world has shifted away from physical goods and towards so-called “weightless goods,” that is, management jobs, IT, software, et cetera. Additionally, the rise of the information age has resulted in a “collapse in demand for unskilled labor.” This makes a well-educated populace essential to GDP growth. The technology causing this shift also fuels the diffusion of information worldwide, so it can be difficult for countries to gain a productive edge in more equal global markets. Given this situation, the United States must use the best resource available to it: its own populace. With over 310 million people, the United States has the potential; it simply needs to harness it.
Human capital offers a unique opportunity for the United States to grow like it used to. Adam Smith divided fixed capital in four components: machines (technology), buildings (businesses), land improvement, and human capital. Human capital he defined as “the acquired and useful abilities of all the… members of society.” America has grown thanks to all four aspects of fixed capital, but there is the most untapped potential in human capital. Like an investment in a new piece of factory machinery or fertile farmland, an educated populace, too, provides returns.
The effectiveness and importance of human capital investment has already been demonstrated. In European countries, investment in education has been linked to higher productivity for individuals and society as a whole. A multinational review concluded that “the impact of investment in education and training on national economic growth is positive and significant.” The role of cognitive skills in economic development has been studied as well, and there is a distinct positive relationship between years of school and growth among nations. Many projections also predict net gains in GDP from more aggressive education reform and greater investment. Even conservative models that show human capital as having little impact on per-capita growth still link it to total productivity. When human capital is abundant like it is in the United States, the rate of return on human capital investment is usually “relatively high.” Countries like Japan and Taiwan have excellently harnessed their human capital to make up for a lack of natural resources.
Human capital investment is undoubtedly effective, and could help the US economy grow like it once did—but what does “human capital investment” actually look like? A crucial component is generally considered “the three R’s,” reading, writing, and arithmetic. However, as previously mentioned, higher education and training are two of the most important components. Schooling cannot only raise skills for workers for a particular job but also can provide knowledge and problem solving abilities. A greater emphasis on Pre-K education, increased investment in public schools, and more subsidies for post-secondary education are all avenues the United States could take to kick start growth. Along with schooling, familial relationships and the raising of children also impact human capital. This is more relevant on a micro level, but if there is a large-scale effort related to child-care improvement, the entire economy may experience increased growth rates.
In addition to the immediate and explicit benefits of education, human capital investment also results in a great deal of spillover. Positive externalities that may not be initially apparently could help the United States in unseen ways. A highly educated populace is better equipped to produce and attack issues that will face the United States in the future. A study in the European Economic Review suggests that general human capital is found to “affect TFP directly as a factor of production, and as a vehicle for international knowledge transfer associated with productivity catch-up.” Research and development spillovers in all sectors are also generally suspected or observed. A possible uptick in innovation would counter the popular “diminishing technological returns” argument as well.
The United States economy has shown sluggish growth for years, and it may never reach GDP expansion seen in the industrial revolution, 1950s, or 1990s ever again. Perhaps using those periods of explosive growth as benchmarks is setting too high of a bar. That being said, if there is a concerted effort to invest in our human capital, it is very possible that the United States will enter a new era of growth. And, even if such investment doesn’t work, there will be a smarter populace to figure out the true key to renewed growth.
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