Alan Greenspan: The critical role of education in the nation's economy
Remarks by Mr Alan Greenspan, Chairman of the Board of Governors of the US Federal Reserve
System, at the Greater Omaha Chamber of Commerce 2004 Annual Meeting, Omaha,
20 February 2004.
* * *
The United States economy has long been characterized by a strong tradition of entrepreneurial spirit
among our business people, a high level of skill among our workers, and an openness by firms and
workers alike to intense competition within and beyond our borders. Those attributes have given us a
standard of living unparalleled for so large a population - and one that has risen steadily over the
history of our nation.
But with that bounty has also come the inevitable stresses and anxieties that accompany economic
advance. One concern that has persisted for some time is the fear that we are irreversibly losing
manufacturing jobs because of businesses' efforts to extract rapid gains in production efficiencies and
to cut labor costs by tapping the lower-wage economies of Asia and Latin America.
More recently, similar concerns have arisen about the possibility that an increasing number of our
better-paying white-collar jobs will be lost to outsourcing, especially to India and China. Many of these
jobs are in the service sector, and they were previously perceived as secure and largely free from the
international competition long faced in the manufacturing sector. There is a palpable unease that
businesses and jobs are being drained from the United States, with potentially adverse long-run
implications for unemployment and the standard of living of the average American.
The issue is both important and sensitive, dealing as it does with the longer-term wealth of our nation
and with the immediate welfare of so many individuals and communities. In the debate that has
ensued, a large gulf is often perceived between the arguments of economists, who almost always
point to the considerable benefits offered over the long term by exposure to free and open trade, and
the obvious stress felt by those caught on the downside of turbulence created by that exposure. It is
crucial that this gulf be bridged.
As history clearly shows, our economy is best served by full and vigorous engagement in the global
economy. Consequently, we need to increase our efforts to ensure that as many of our citizens as
possible have the opportunity to capture the benefits that flow from that engagement. For reasons that
I shall elucidate shortly, one critical element in creating those opportunities is to provide rigorous
education and ongoing training to all members of our society. This proposal is not novel; it is, in fact,
the strategy that we have followed successfully for most of the past century and a strategy that we
now should embrace with renewed commitment.
Over the long sweep of American generations and waves of economic change, we simply have not
experienced a net drain of jobs to advancing technology or to other nations. Since the end of World
War II, the unemployment rate in the United States has averaged less than 6 percent with no apparent
trend; and as recently as 2000, it dipped below 4 percent.
Moreover, real earnings of the average worker have continued to rise. Over the past century, per
capita real income has risen at an average rate of more than 2 percent per year, declining notably only
during the Great Depression of the 1930s and immediately following World War II. Incomes trended
higher whether we had a trade deficit or a trade surplus and whether international outsourcing was
large or small.
The reason for this positive long-run trend in living standards appears to be that more fundamental
economic forces are determining real incomes, irrespective of the specific jobs in which they are
earned and irrespective of the proportion of domestic consumption met by imports.
Intensive research in recent years into the sources of economic growth among both developing and
developed nations generally point to a number of important factors: the state of knowledge and skill of
a population; the degree of control over indigenous natural resources; the quality of a country's legal
system, particularly a strong commitment to a rule of law and protection of property rights; and yes, the
extent of a country's openness to trade with the rest of the world.
For the United States, arguably the most important factor is the type of rule of law under which
economic activity takes place. When asked abroad why the United States has become the most
prosperous large economy in the world, I respond, with only mild exaggeration, that our forefathers
wrote a constitution and set in motion a system of laws that protects individual rights, especially the
right to own property. Nonetheless, the degree of state protection is sometimes in dispute. But by and
large, secure property rights are almost universally accepted by Americans as a critical pillar of our
economy.
While the right of property in the abstract is generally uncontested in all societies embracing
democratic market capitalism, different degrees of property protection do apparently foster different
economic incentives and outcomes. Someone who owns a piece of land, but is restricted to a specific
use, does not have unequivocal ownership and will act accordingly. Indeed, economic regulation, by
its nature, impinges on the exercise of a property right. Continuous changes in regulations and, hence,
in the consistency of property protection create a less certain environment, which undermines
incentives to long-term investment and prevents the most productive use of our resources. The high
level of protection for property rights and, for the most part, our reliance on regulation that is
marketsensitive are significant factors in the overall attractiveness both to Americans and to foreigners of
investing in the United States.
The second critical aspect of wealth creation in the United States, and doubtless globally, is the level
of knowledge and skill of the population. Today, the knowledge required to run the economy, which is
far more complex than in our past, is both deeper and broader than ever before. We need to ensure
that education in the United States, formal or otherwise, is supplying skills adequate for the effective
functioning of our economy. The recent exceptional trends in U.S. productivity suggest that we are
coping, but this observation should not lead to complacency.
* * *
Productivity in the United States has increased generation after generation, creating ever-rising
standards of living. This trend has persisted whether our competitive advantage came from the
development of more efficient technologies in agriculture, textiles, and steel, or, more recently, from
the design and fabrication of microprocessors and the harnessing of the human genome. Our
knowledge-based skills in a business environment, supported by a rule of law, have enabled our
workforce to create ever-greater value added - irrespective of what goods and services we have
chosen to produce at home and what and how much we have chosen to import.
Only when property rights are adequately protected will the entrepreneurs willingly work a heroic
eighteen hours a day in their garages or at their computer terminals, secure in the knowledge that they
will own what they create. In addition, those workers who are fortunate to work in a nation that protects
the property rights of investors, both foreign and domestic, will benefit from the low cost of capital
associated with secure property rights. That protection has fostered a thriving venture capital industry
to finance the nascent ideas of budding entrepreneurs and has motivated existing businesses to invest
some of their profits in research development.
The real income earned by a worker depends importantly on his or her intelligence and skill. The
capacity of workers, after being displaced, to find a new job that will eventually provide nearly
comparable pay most often depends on the general knowledge of the worker and the ability of that
individual to learn new skills. Even in the best of circumstances, discharged workers experience some
loss of income in a transition to a new job and the associated new skills. Indeed, finding a new job
takes time, and typically results in at least a temporary drop in pay. That loss, especially in a soft labor
market, is not only a short-term drag on aggregate incomes but also a source of stress on the affected
individuals.
Generic capabilities in mathematics, writing, and verbal skills are key to the ability to learn and to apply
new skills and thus to earn higher real wages over time. The avenues to acquiring those skills are
many, and one effective tool that we have developed to facilitate the transition to a new job or
profession has been our community colleges. These two-year institutions have been in the forefront of
teaching the types of skills that build on workers' previous experiences to create new job skills.
Currently almost one in three of their enrollees are aged thirty or older, a statistic that suggests that
these individuals have previous job experience. The impressive expansion of these learning centers
attests to their success in imparting both general and practical job-related learning. A rising proportion
of the population is also taking advantage of both general adult education and work-related instruction.
The fact that, over the years, more than 94 percent of the workforce has been employed, on average,
indicates that U.S. workers apparently have been sufficiently skilled and motivated to learn the new
tasks that enable them to earn, on average, an ever-rising real wage.
The never-ending necessity to learn new skills is due to the gradually but inexorably changing nature
of our economy. The innovations that have so accelerated productivity in recent years are an
extension of a longer-term, ever-growing conceptualization of economic output. The value added to
our GDP from physical material input and manual labor has grown very slowly over the decades.1 By
far, the greatest contribution during the past half century to our average annual real GDP increase of
3-1/4 percent has been the ideas embodied in both our human and physical capital. Technological
advance is continually altering the shape, nature, and complexity of our economic processes.
This rising complexity has required the labor force to be more and more technically oriented. Years of
schooling, a rough proxy for skills, averaged nine and one-quarter years in 1950. A half century later
schooling averaged more than twelve years. But technology and, more recently, competition from
abroad have risen to a point at which demand for the lowest skilled workers in developed countries is
diminishing, placing pressure on their wages. These workers will need to be equipped with the skills to
compete effectively for the new jobs that our economy will create.
But where will these jobs come from? For generations, human ingenuity has been creating products,
industries, and jobs that never before existed, from vehicle assembling to computer software
engineering, and with them have come new opportunities for workers with the necessary skills. Judged
by rates of return and productivity gains, our workforce has appeared sufficiently skilled, through these
generations to manage our increasingly complex capital stock.
But in the past two decades, our system has had obvious strains, apparently reflecting an inability of
our workforce to fully meet the ever-increasing skill requirements of an economy whose GDP is
becoming more conceptual.
At the risk of some oversimplification, if the skill composition of our workforce meshed fully with the
needs of our increasingly complex capital stock, wage-skill differentials would be stable, and
percentage changes in wage rates would be the same for all job grades. But for the past twenty years
the real incomes of skilled, especially highly skilled, workers have risen more than the average of all
workers, whereas real wage rate increases for lesser-skilled workers were below average, indeed flat.
This situation suggests that, broadly speaking, we have been facing a shortage of highly skilled
workers and a surplus of lesser-skilled workers relative to the optimum needs of our capital stock.
Through the 1960s, the addition of skilled college graduates to the labor force, in part the result of
schooling financed by the GI Bill, was sufficient to hold wage increases among the highly skilled to
average gains. Real wages of the lesser skilled also rose significantly, in part, the result of effective
high-school educations and the many skills learned during the war.
Although in recent years the proportion of our labor force made up of those with at least some college
has continued to grow, we appear, nonetheless, to be graduating too few skilled workers to address
the apparent imbalance between the supply of such workers and the burgeoning demand for them.
Perhaps the accelerated pace of high-tech equipment installations associated with the large increases
in productivity growth in recent years is placing unachievable demands for skilled graduates over the
short run. If the apparent acceleration in the demand for skilled workers to staff our high-tech capital
stock is temporary as many presume, the pressure on our schools would ease as would the upward
pressure on high-skilled wages.
More broadly, in considering the issue of expanding our skilled workforce, many have a gnawing
sense that our problems may be more than temporary and that the roots of the problem may extend
back through our education system. Many of our students languish at too low a level of skill, and the
result is an apparent excess of supply relative to a declining demand. These changing balances are
most evident in the failure of real wages at the lower end of our income distribution to rise during the
past quarter century.
The hypothesis that we should be able to advance the knowledge that our students acquire as they
move from kindergarten to twelfth grade, gets some support from international comparisons. A study
conducted in 1995 revealed that, although our fourth-grade students were above average in both math
and science, by the time they reached the eighth grade, they had dropped closer to the average.2 By
the time they were in their last year of high school, they had fallen well below the international
average. Accordingly, we apparently have quite a distance to go before we catch up.
In short, our secondary school system needs to serve the requirements of a changing economy in the
same way that the expansion of high schools with a broad curriculum served us so well in the first half
of the twentieth century. Early last century, technological advance required workers with a higher level
of cognitive skills - for instance the ability to read manuals, to interpret blueprints, or to understand
formulas.
Our educational system responded: In the 1920s and 1930s, high school enrollment in this country
expanded rapidly, pulling youth from rural areas, where opportunities were limited, into
moreproductive occupations in business and broadening the skills of students to meet the needs of an
advancing manufacturing sector. It became the job of these institutions to prepare students for work
life. In the context of the demands of the economy at that time, a high-school diploma represented the
training needed to be successful in most aspects of American enterprise. The economic returns for
having a high-school diploma rose and, as a result, high-school enrollment rates climbed.
By the time that the United States entered World War II, the median seventeen-year-old was a
highschool graduate - an accomplishment that set us apart from other countries. I cannot dismiss the
notion that we can learn something from that period and perhaps from other countries. Still, I realize
that the world was different from today in many ways. Societal changes have been numerous and
profound, and our schools are being asked to do a great deal more than they have in the past. We
need to be forward looking in order to adapt our educational system to the evolving needs of the
economy and the realities of our changing society. Those efforts will require the collaboration of
policymakers, education experts, and - importantly - our citizens. It is an effort that should not be
postponed.
* * *
We have seen encouraging signs of late that the labor market is improving. In all likelihood,
employment will begin to increase more quickly before long as output continues to expand. But fears
about job security are understandably significant when nearly two million of our workforce have been
unemployed for more than a year. We have reason to be confident that new jobs will displace old ones
as they always have, but America's job-turnover process is never without pain for those caught in the
job-losing portion.
Those who have lost jobs, I know, are not readily consoled by the fact that current job insecurity
concerns are not new. But keeping the current period in context is instructive. Jobs in the United
States were perceived as migrating to low-wage Japan in the 1950s and 1960s, to low-wage Mexico in
the 1990s, and most recently to low-wage China. Japan, of course, is no longer characterized by a
low-wage workforce, and many in Mexico are now complaining of job losses to low-wage China.
To be sure, many of our fellow citizens have experienced real hardships in our economic environment,
which is becoming ever more internationally competitive. But the protectionist cures being advanced to
address these hardships will make matters worse rather than better.
The loss of jobs over the past three years is attributable largely to rapid declines in the demand for
industrial goods and to outsized gains in productivity that have caused effective supply to outstrip
demand. Protectionism will do little to create jobs; and if foreigners retaliate, we will surely lose jobs.
We need instead to discover the means to enhance the skills of our workforce and to further open
markets here and abroad to allow our workers to compete effectively in the global marketplace.
In closing, I have stressed the importance of redressing the apparent imbalances between the supply
and demand for labor across the spectrum of skills. Those imbalances have the potential to hamper
the adjustment flexibility of our economy overall. But these growing imbalances are also aggravating
the inequality of incomes in this country. The single central action necessary to ameliorate these
imbalances and their accompanying consequences for income inequality is to boost the skills, and
thus earning potential, of those workers lower on the skill ladder.
To be sure, Americans have not been obsessed with the distribution of income but have instead
placed much greater emphasis on the need to provide equality of opportunity. But equal opportunity
requires equal access to knowledge. We cannot expect everyone to be equally skilled. But we need to
pursue equality of opportunity to ensure that our economic system works at maximum efficiency and is
perceived as just in its distribution of rewards.