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We Need to Refocus on the Foundations of America’s Long-Term Growth

George W. Bush Institute-SMU Economic Growth Initiative Director Cullum Clark shares his thoughts on how to strengthen America’s economy.

Article by J.H. Cullum Clark May 31, 2018 //   5 minute read
Dallas Hall on the campus of SMU in Dallas.

You have said the long-term health of the public and private sectors are important to economic growth. What do you mean by this? 

A healthy, growth-friendly public sector delivers what economists call “public goods” at a reasonable cost. These include core government functions like national defense and the legal system, as well as economic services the government is best positioned to provide, like funding for basic research, physical infrastructure, and a safety net.  

America’s public sector is on an unhealthy, unsustainable trajectory. The federal government’s spending on Social Security, Medicare, and Medicaid is increasingly crowding out other national priorities. Medicaid and public employee pensions are eating into education for many of our state and local governments. Meanwhile, the mushrooming federal debt will absorb an ever larger share of the nation’s savings in the decades ahead, crowding out private sector capital investment and research and development (R&D). One of the best steps America can take to promote strong growth is to rebalance the public sector’s spending priorities in favor of the long-run needs of the future, particularly in education, research, and infrastructure.

The United States has the most dynamic, entrepreneurial, innovative private business sector in the world. That said, we need to pay close attention to the foundations underlying America’s long-term prosperity. The number of businesses getting started each year is down by roughly a quarter from the peak level reached in the last decade. The rate of productivity growth and innovation in our economy has been trending downwards for several decades, as economist Robert Gordon has documented.  

The pursuit of faster economic growth is about improving human well-being, and what determines people’s well-being is technological progress. So, we need to develop a better understanding of what accounts for these troubling trends in entrepreneurship and innovation. 

How do education and American prosperity go hand-in-hand? 

The United States owes its leading place in the world economy to its historic achievements in education. We led the world in reaching near-universal literacy more than a century ago, and in reaching high college attendance and completion rates in the early decades after World War II.  

Economists agree that growth in a country’s stock of “human capital” plays a central role in driving economic advancement. Economic progress is about learning over time to deliver new goods and services that enrich people’s lives, or to make existing products more efficiently. This process takes inventive ideas and machines, but also requires well-prepared, adaptable people. 

Today, numerous countries have caught up and surpassed the United States in college attainment levels. American students are falling behind in math and science when compared to their peers in numerous countries. Economist Eric Hanushek makes a convincing case that raising education levels to the German or Canadian level — not just in terms of how many years students are in school but what they’re learning — would likely increase our economic growth rate by at least 0.25 to 0.50 percent per year over a period of decades. Consider, for instance, that American students spend approximately 175 to 180 days in the classsroom, while Canadians spend 190 to 195 days in school. 

How can we make economic growth more inclusive? 

This question is one of the most profound and pressing of our time. The usual answers include improving educational opportunities for disadvantaged young people and increasing incentives to work and save. They also include encouraging private sector investment and R&D within our country, since low- to medium-skilled workers will become more productive, and consequently earn more, if they have access to more sophisticated tools. 

But recent economic research increasingly points to other measures that would likely promote more broadly inclusive, widely shared prosperity. Some possibilities: lighter occupational licensing regulations, allowing easier entry for entrepreneurs and promote greater workforce adaptability; tougher anti-trust enforcement, reducing barriers to entry for young, innovative firms; greater place-based government assistance, to cope with the growing geographic concentration of economic hardship; looser land-use regulations to reduce housing-cost barriers, promoting upward mobility; intentional efforts to promote ownership of houses and other financial assets for disadvantaged families; and a serious rethinking of criminal sentencing and public health, to address the toll that prison time for non-violent offenders and the opioid scourge are taking on all too many people’s participation in the workforce.