Education and the Future American Economy

Our recent Seeking Alpha exclusive, The Story of America’s Economic Future, as Told by Demographics, outlined how America has the opportunity to capture a demographic dividend over the next three decades thanks to an addition of 100 million people to the population, and a persistent “prime-age bulge”. In this paper, we deal with a likely headwind to this dividend; technological advancement and its foundation, education. We also provide several suggestions for investing in this knowledge.

The Effect of Education

There is little doubt that the success of an economy is intimately tied to the level of technology. Technology itself is routinely misunderstood to be the same as science, which can, and does lead to inadequate funding levels for science.

Science (basic research) is the curiosity driven pursuit of knowledge and understanding by way of the scientific method, while technology is the application of scientific knowledge to create labor-saving devices — in other words, tools. Not properly funding basic science, but expecting cutting edge technologies is analogous to demanding gourmet meals while refusing to spend money on groceries. Unless science is properly capitalized, technology will be reduced to cutting and pasting others’ second-hand inventions, which historically has never been a characteristic of leading economies.

Good science is a creation of a good education system. If you want good science and technology, you better place education at the front of the funding line. The GI Bill that was put in place after the second World War, provided free education or training to any veteran that was accepted into an institution of higher learning, regardless of the cost. The Bill provided free tuition to any and all universities, including the private Ivey-leagues.

“The scientists and engineers and teachers and thinkers who brought in the information age, who took us to the moon, who waged the cold war, you name it — all those men and women were educated through the GI Bill.” (Ed Humes, as quoted in Marketplace)

In contrast to the post-WWII period of widely affordable education, the situation today and into the future does not look promising:

The cost of a university education has risen since 1972 at more than triple the overall rate of inflation. Between 2001 and 2012 funding by states and localities for higher education declined by fully one-third when adjusted for inflation. In 1985 the state of Colorado provided 37 percent of the budget of the University of Colorado, but last year provided only 9 percent. Presidents of Ivy League colleges and other elite schools point to the lavish subsidies they provide as tuition discounts for low- and middle-income students, but this leaves behind the vast majority of American college students who are not lucky or smart enough to attend these elite institutions. (Gordon)

The chart below from the Minnesota Private College Council shows the linear correlation between income and educational attainment.

The relationship demonstrated above, is not a reflection of a difference in abilities between low and high income students. This is evident in the chart below where high-scoring, low-income students have essentially the same college completion rates as low-scoring, high-income students. It comes down to having the financial resources to survive a college education without having to work part-time or interrupt your studies in order to work.

America has some of the best educational institutions in the world, but these excellent institutions are primarily accessible only to the very rich. According to the OECD, U.S. citizens spend 1.4 percent of GDP on private university education, outdone in the G20 only by Korea at 1.5 percent. Those that can afford it, buy a better education.

The education that is left-over for the general public is substandard, as evidenced by the most recent (2012) international PISA testing of fifteen year-olds: America ranked 24th in reading, and 36th in mathematics, and 28th in science. At the college level, the ACT college entrance test organization reports that only 25 percent of high school students have adequate scores in reading, math, and science. This does not sound like fuel with which to launch a future technologically-driven economy.

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Forty years of private equity trading, and still learning.

Forty years of private equity trading, and still learning.