"Education - Key to Global Competitiveness"

Sydney M. Williams

Thought of the Day

“Education – Key to Global Competitiveness”

November 1, 2010

According to the Financial Times, net trade knocked two percentage points off third quarter GDP. Exports of goods and services rose 5.0%, while imports increased 17.4%. The increase in imports came despite the Dollar Index declining 8.4%. There are only four components of GDP – consumption, business investment, government spending and the net of exports over imports. The consumer accounts for about 70% of GDP. In the current quarter, consumer spending grew at 2.6%, the most in four years. Nevertheless, he has been retrenching (increasing savings) and will likely continue to do so. Business inventories were up 5% in the quarter; however, without final sales increasing that is unsustainable. Federal government spending was up 8.8%, but state and local spending was down.

We are caught in this web: a consumer who needs to reduce his debt; small and midsize businesses with little confidence; a federal government that is growing exponentially, and a developing world that is increasingly better educated and more competitive than ours. The web is further complicated because of a banking system that is more capital constrained, in part because of Basel III requirements. Is this a “new normal” as the folks at PIMCO would have you believe, or a “new abnormal”, as the Wall Street Journal put it in an editorial on Saturday? I suspect PIMCO is closer to the mark, but who cares? It is the way the world is; we must deal with it.

While the federal government contemplates adding another half billion or perhaps a trillion dollars in quantitative easing, the consumer appears to instinctively understand Jeremy Grantham’s admonition: “there is no long term connection between debt and GDP growth.” Mr. Grantham presents a chart in his October quarterly letter that goes back to 1952. It indicates that over the past 28 years the debt to GDP ratio tripled, yet the rate of GDP growth slowed during those same years. Quantitative easing may help borrowers, but it hurts lenders. And, over the longer term, it will be inflationary; when that becomes apparent it will hurt borrowers, including the federal government (us, the tax payers!), for interest rates will rise. It is not lower rates that will jump start the economy; it is confidence. It is ironic (or perhaps not?) that unschooled consumers appear to have a better sense of what lies down this road of a bloated government adding new debt, than do highly educated policy wonks in Washington.

The most sensible way out of this mess is to focus on growth. A strong and expanding economy produces revenue for the government. A business-friendly environment is critical. Higher taxes impair growth. One can compare Texas to California, the nation’s two most populous states. One state is friendly toward consumers and business; the other is not. One has no income tax – Texas; California’s top rate is 10.55%. State and local spending as a percent of GDP is 18% in Texas, 25% in California. According to an October 22, 2010 report from the Bureau of Labor Statistics 22, unemployment in Texas is 8.1%; in California, it is 12.4%. And a focus on growth leads back to exports. A focus on exports is to understand the urgency of centering on education.

The Trends in International Mathematics and Science Study (TIMSS) is conducted every few years. One is being conducted this school year. The last was done in 2007. The study equates standardized test scores of eighth-grade students in each of the fifty states with their peers in forty-five countries. According to a New York Times study, while American children earned scores comparable to their peers in places like Slovakia and Estonia, they lagged behind children in Singapore, Taiwan, South Korea, Hong Kong and Japan. In fact the highest ranking states – Massachusetts in math and North Dakota in science – lagged those same Asian nations. In the lowest performing state – Mississippi – the scores were roughly equivalent to those in Bulgaria and Moldova.

Every President since Lyndon Johnson has made education a priority. Yet the state of public schools, especially those in poor urban and rural areas, has continued to decline. President Bush teamed up with Senator Ted Kennedy and presented the nation with “No Child Left Behind”. President Obama has his: “Race to the Top”. The main barrier to reform has been the teacher’s unions, which provide tenure after two years and, when budgets are cut, practice “last in, first out”. Meritocracy plays no role. The unions, because of their size, wield enormous weight. They are the single largest contributor to political campaigns with 90% of their money going to Democrats. To his credit, President Obama has been the first President to show signs of confronting the unions.

Like the passionately anti Communist Richard Nixon going to China in 1972, it will take a liberal Democrat to beat back the teachers unions. Perhaps Mr. Obama can do it. I hope so. I find myself at odds with many of his programs; but in this instance I believe he is trying to do the right thing. “Race to the Top” includes merit pay initiatives and looks to expand the number of charter schools.

But the problem runs deep. “Year after year, our schools are run for the benefit of the adults in the system, not for the benefit of the kids.” So wrote Michelle Rhee and Adrian Fenty in an article in Saturday’s Wall Street Journal. The American Federation of Teachers spent $1 million to defeat Adrian Fenty in the recent Democratic mayoral primary in Washington, D.C. (thereby effectively removing Michelle Rhee as chancellor of that city’s school system).

While our schools are mired in the past, the world is changing. The Group of Seven (G7 – Canada, France, Germany, Italy, Japan, the United Kingdom and the United States), as recently as 2000, comprised 65% of global GDP. Two weeks ago, Bloomberg, based on data compiled from the IMF, predicted that those seven nations will contribute less than 50% of global GDP by 2012. Our ability to maintain our standard of living will depend on our ability to compete in a smarter more competitive world. That starts with the school system.

One cannot watch Davis Guggenheim’s movie, “Waiting for Superman” without tears welling in one’s eyes, not just for the children living in homes that most of us cannot imagine and attending schools that in no way reflect the dollars spent, with they and their parents forced to sit through humiliating lotteries, but for our nation, which has allowed this condition to come to pass, and for what it means to our economic futures. We cannot halt the rise of the developing world. In fact we must embrace it, but we can halt the decline that is ours. Education and economic prosperity are inextricably linked.