Promoting America’s Economic Security through Education

Panel: “Long-Term Security and Our Nation’s Public Schools”

On behalf of all my colleagues at the Hamilton Project, I want to thank you very much for inviting me to be with you here today to take part in this exciting conference.

Before I begin, let me say a brief word about the Hamilton Project, as it is a recent creation of some of you may not be familiar with it. The Project was launched in April of 2006 by a group of business leaders and former policy makers, including former Treasury officials Robert Rubin and Roger Altman. And the impetus for its creation was a shared feeling that the U.S. was on the wrong track economically and that new intellectual energy was needed to develop a serious, systematic strategy to address the challenges the U.S. economy faces. We draw on the work of leading scholars from around the country to advance innovative and evidence-based policy ideas that are consistent with our broad goal of promoting broad-based economic growth and opportunity.

I am particularly pleased that the conference organizers included a panel on education as part of a conference about our nation’s security. I want to do two things with my few minutes: first, paint a broad picture about the relationship between education and promoting our nation’s economic security. And, second, describe one aspect of The Hamilton Project’s strategy and how it applies to the issue of college affordability, which is critically important to raising levels of educational attainment.

I use the term “economic security” in two senses. First, at an individual level, education is critically important to enhance the economic security of American families; and second, at a national level, building the skills of the 21st century workforce in America is necessary to keep America competitive in the new global economy.

On the first point-enhancing economic security for families-as inequality has risen to stunning levels in this country, it is more critical than ever that all Americans have the tools they need to become part of tomorrow’s high-skilled workforce and share in our nation’s prosperity. Expanding the opportunities for high-quality education directly addresses one of the major causes of increased inequality: technological changes that increasingly reward skilled workers.

On the second point-our national competitiveness-education is a powerful driver of national economic growth. In fact, the increases in education of the American workforce accounted for nearly one-quarter of the total growth in labor productivity in the 20th century. In the 21st century, knowledge will be even more important to economic prosperity.

Unfortunately, we’ve seen levels of educational attainment and test scores in the U.S. decline relative to the rest of the world. U.S. performance on international tests has not changed much in the past decade. But our rank relative to the rest of the world has declined. In other words, we’ve been treading water while they have pushed forward.

That is a particularly concerning trend because education will be our great strength as more populous nations like China and India enter the global economy. We know that we’re not going to compete with these nations on labor costs. And, increasingly, competition from such populous countries is not limited to low-skill labor. Advances in technology mean that workers in those countries can perform more and more high-skill work-from reading x-rays to legal work to multimedia production and potentially to all services that can be delivered digitally, as Alan Blinder trenchantly put it in a recent Foreign Affairs article.

In this new world, we need to ask ourselves what is going to be our competitive advantage? And the key question is, will the U.S. remain the focal point for innovation; will we remain at the frontier of the development of new knowledge and the creation of entirely new industries that drive economic growth? To do that, we need to equip American workers to succeed in the global economy by providing them with a high-quality education that fosters creativity, innovation and analytical rigor.

So the question is, how do we do this? How do we provide Americans with the education needed to create a high-skilled workforce? That’s too complicated a subject to answer in my 10 minutes. But let me speak to one premise that has motivated several of the innovative policy ideas the Hamilton Project has released.

What’s clear is that more funding alone will not address our educational challenges. To be sure, there are major funding gaps in our current education system and substantial evidence that additional money would bring large benefits in certain areas, such as early childhood education.

In many other areas, however, the biggest potential gains by far will come from spending our current resources more wisely than we do today. Even the most ambitious proposals for new spending are dwarfed by the scale of our existing government spending on education-roughly $500 billion annually on K-12 education, for example.

Let me speak to one area of education where better targeting government resources can be particularly effective and which has been a source of much recent attention here on Capitol Hill: Expanding access to higher education. This is a topic about which the Hamilton Project will be releasing discussion papers at an event at the National Press Club that will feature panelists including Larry Summers, Joel Klein and Nobel-Prize winner James Heckman in a discussion moderated by the Georgetown Public Policy Institute’s Dean, Judy Feder.

The rising cost of college is a source of concern for millions of students and their families. Yet while college costs have risen sharply, so has the value of a college degree. For most students, college is a very good long-term investment. Thus, it may not be the most effective use of government resources to subsidize the cost of college for the many individuals who will more than recoup their investment.

Instead, the focus of higher education policy should be to make sure that more students attend college and that talented students are not deterred by cost. This involves removing barriers to attendance and sending a clear signal that if you want to go to college, the up-front costs will never be an impediment.

One barrier is a liquidity constraint, which government can address by helping students borrow against future earnings. But today’s loans have many features that discourage students, including short repayment periods that require students to pay back the bulk of the loan in the first few years after graduation, a time when earnings are generally much lower than they would be later in a worker’s career.

In addition, government can better target its resources by expanding the availability of income-contingent loans, and this is another topic that we’ll talk about at our event next week. Such an approach is guided by evidence that a college education, while still a good investment for most, is riskier than it used to be, paying off handsomely for some and not at all for others. Thus, rather than redistribute resources to all fortunate enough to attend college by making loan subsidies more generous, government should assist those who fall significantly short of the average college graduate’s future earnings, which is increasingly likely as the returns to college attendance have grown more varied.

States should also consider shifting toward a higher tuition, higher aid model for state colleges and universities, under which states would spend the same amount of money but better target it to lower the financial barrier to college for students from poorer backgrounds.

The higher tuition, higher aid approach only works, however, if the aid process is transparent enough that low-income students are not dissuaded from even applying by the sticker shock of list tuition. The process must make students aware that they are eligible for aid: indeed, according to the College Board, only 38 percent of full-time undergraduates pay the full cost of college.

But we know that the tremendous complexity of the current system of financial aid is a significant barrier to college attendance, particularly for low- and moderate-income students.

The ostensible reason for all these long and complex forms is to target aid to those who need it most. But another paper we’ll release next week by two Harvard economists shows empirically that a dramatically simplified aid process with far fewer pieces of information asked of applicants could reproduce nearly the same distribution of aid as does the current system. In other words, instead of asking the 137 questions currently on the FAFSA, you could ask just a handful of questions about family income-information the IRS already has on the tax returns you fill out, so you would not necessarily even need to fill out a new form-and the difference between how much aid people receive under the simplified process and under today’s complex process is negligible.

Based on this evidence, the paper proposes a simplified aid formula that fits easily on a postcard so that aid information could be straightforward, certain, and delivered early. Evidence suggests that this simplified aid program could increase enrollment among the grant-eligible population by roughly 6 or 7 percentage points.

This approach-targeting resources based on hard evidence where they will have the greatest bang for the buck-is essential if we going to effectively make the education investments in the 21st century that were so critical to our remarkable economic growth in the 20th century. Strengthening our education system to build a high-skill workforce is key to America’s ability to enjoy another century of such strong economic success.

Again, I hope you’ll attend our event next Thursday, details available at hamiltonproject.org. Thank you for your attention and I look forward to our discussion and your questions.