America’s Talent Deficit: A Free Market Solution

The plight of the anti-austerity crowd in the PIIGS countries often loses my sympathy when I notice that the most vociferous and violent protestors seem to be students against cuts in university subsidies. If there is one “entitlement” that has no moral basis whatsoever, in my opinion, it is this one, yet these free-riding students are the most self-righteous. I pity many of the people who are dependent on the bankrupt systems they grew up in, sometimes through no fault of their own.  These include it’s-too-late-to-start-over Social Security dupes, already-sick Medicare recipients and I-paid-into-Unemployment-for-years dolees. 

Professional students, however, are not on my sympathy list. I have come to believe that higher education is not really serving the social purpose these angry, marching students seem to base their sense of righteousness on. That is, higher education is not simply the great equalizer, the path on which the have-nots can learn the secrets of the haves and enter their ranks based not on birth but on merit. Today’s higher education is not intended simply to illuminate the minds of the children of the ignorati with crucial facts, critical thinking and the art of argument–doing that really would give the ruling classes a run for their money!  No, in my experience (and I’ve had much in that arena), higher education is more often used to educate the best and the brightest in the ways of the existing paradigm and then instruct them to serve it. (A sentiment reflected in the exhortations of Michelle Obama: “Don’t go into corporate America…become teachers…be social workers.”)

So why are these students so desperate to be in school? In my mind, they fall into three categories: First there are the students who have spent their lives not laboring for their own upkeep or that of their dependents (like those protestors for whom I have a bit of sympathy), but who have spent most of their lives indulging their intellectual curiosity–as a retiree might have saved his whole life for the luxury to do; second are those headed for professorships who have spent all of their adult lives preening in the mutual admiration society that passes for academia these days; and third there are those who are pursuing higher education to increase their productivity and establish careers.

Believers in “public goods” (of whom I am not one) might argue that the first two categories are the thinkers and academics who are crucial to society but whom the private sector would underproduce–an argument for government funding. I will not argue that point now because, to my surprise, the vast majority of European undergraduate and graduate students fall into the third category: 34% are pursuing social sciences, business and law, and 25% are pursuing science, math, computing, engineering, manufacturing, construction and agriculture. Because the vast majority of students are pursuing careers that are meant to have commercial value, why not incorporate the costs of their job training into their decisions and ultimately into the pay they command. “Free education” for ultimately commercial purposes is tantamount to corporate welfare just as government funded research has become. If these students had to finance the actual cost of their educations at fair market prices, students would allocate themselves efficiently into careers as the job market was demanding them, and by creating supply that matches demand, pricing would clear; that is, corporations would have to pay students a wage reflective of the cost they incurred to train themselves.

To send people to college for years on end at the expense of the state unconstrained by free market mechanisms such as the availability of personal savings, market-priced loans, academic scholarships and corporate sponsorships has dire consequences. First and foremost, government carte blanche for education, as in any other industry, results in overdemand and superinflationary price increases. Second, unlimited school loans often educate those who would be better off (and certainly would serve society better) out in the workplace actually producing. Finally, and perhaps cynically, state-promoted studentship warehouses young people en masse, masking rather than combating the structural unemployment that is rampant in many western countries.

Since this has been top of mind for me lately, I took an opportunity to apply the above sentiment to the US education crisis in a letter to the editor of The Wall Street Journal upon reading an article by Microsoft’s general counsel, Brad Smith, in Friday’s edition.  Here’s my letter (I’ll update you if it gets published!):

Dear Sir,

I had heard President Obama speak of the talent deficit early in his term but, presumably because it is apparently widening under his watch rather than shrinking, I have not heard him mention it lately. Unfortunately, if he were to pursue a solution, it would undoubtedly be based on the same fundamental principle as Mitt Romney has implied he would support and that Brad Smith describes in his recent article in your pages, How to Reduce America’s Talent Deficit. Of course that fundamental principle is more government spending on higher education. This solution is offered by these men for different reasons: Mssrs. Obama and Romney because government is their business and as in the quip that every surgeon’s cure requires surgery, every politician’s solution requires more government; and Microsoft’s Mr. Smith because the government would be subsidizing what amounts to employee training for his company.

The fact is that eliminating all government subsidies of higher education is the only way permanently to close the ever-elusive talent gap. Without government promotion of college-for-college’s-sake, school loans would only be available to students whose educations had a positive NPV. Banks would still lend money to college students for tuition, but only if the lenders determined that those students would make enough money after graduation to pay it back.* This would direct students into the careers demanded by the marketplace at any given time without a central body having to pick winners and without using taxpayer money to subsidize the profits of corporations or the incomes of their employees. (As for the unquantifiable value of education, the 13+ years Americans spend in school prior to college should be enough time to cover everything from Cato to Calculus, and if it’s not, get the government out of that too!)

If the feds really wanted to do something to help this process along, they could reduce the corporate tax rate to zero. Given that individuals (employees, consumers, shareholders) ultimately pay all taxes anyway, this revenue loss (a “mere” $181 billion, or 7.9% of federal revenue in 2011), even if made up through other taxation, would not result in an increase in the overall tax burden individuals currently bear. (By eliminating federal subsidies, the total tax burden would actually fall, ceteris paribus, by $20 billion currently spent on higher education.) The obvious benefit of eliminating corporate taxation would be foreign companies flocking to the US and US companies staying or coming back, many of whom would find it worthwhile to bear the cost of educating employees as needed–some already do.

The higher employment levels, GDP growth and overall prosperity that would result from this free market solution would profoundly alter the current trajectory of the US economy–without additional government spending or the need for central planning.

Monica Perez
Atlanta, Georgia


*For those of you who would argue that this would never happen–that banks would not lend to students unless guaranteed by the government–it’s simply not true. As evidence I offer this example: a classmate of mine at law school had a modicum of fame having fought Citibank (and won) to stop them from discriminating against students applying for credit cards based on their majors. Citibank would assess a student’s creditworthiness based on the likelihood that his future employment would provide the funds to pay his credit card balance. I thought this was eminently sensible at the time, and although I didn’t mention it to my classmate (a lovely girl, despite her penchant for combat), I thought not only that Citibank was right, but that school loans themselves should work that way. To some extent I actually think they do: It was easy for me to rack up six figures in loans to spend four years at Stanford earning a JD-MBA, while my roommate, who was earning a masters in Chinese, was struggling for one of the very few PhD spots in the subject. There were few spots because these sorts of PhD programs were almost exclusively work-study programs. Recognizing the reality that those headed for lives in academia are unlikely to be able to repay the tens if not hundreds of thousands of dollars of school loans five years of graduate school would otherwise generate, the schools collectively matched their training of Chinese professors with their need for them.

If you are interested in reading a refutation of Mr. Smith’s claim that there is a growing talent deficit in this country, read The False Theory of the Growing Jobs Mismatch, in Businessweek from May of this year.  I don’t know which argument has more spin–what do you think?

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