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The Great American Growth Machine and How to Fix it

That's, more or less, the title of the article on the front page of the Wall Street Journal's Saturday Review section last weekend. It was written by Alan Greenspan, the former head of the Federal Reserve and Adrian Wooldridge, the political editor of the Economist. The authors point to slow growth, the decline in productivity of the economy as a whole and the unusually slow rate of formation of new firms as signs that the kind of dynamism that has characterized the United States since its founding is ebbing, and they point to increasing regulation and the rising cost of social benefits provided by government as the culprits.

I beg to differ. As the authors point out, the U.S. accounts for less than five percent of the world's population, but almost a quarter of the world's gross domestic product. That must mean that we are among the most productive people on earth...by definition. How do we manage that? Well, as the authors point out, we are home to 15 of the world's top 20 universities, according to the QS World University Rankings, which gives us an edge in the kind of research that is driving innovation in many industries as never before. But research is hard to bottle. Once it has been published, firms all over the world have access to it.

That is not true, however, of a nation's people. In the world we live in today, the skills of a nation's workforce can make or break that country's economy. That is because, since the 1980s, firms can locate production of both goods and services anywhere in the world, independent of where they are designed, where they will be sold, or where their headquarters are. That reality created a worldwide market for labor. In some cases, firms access that market by locating their plants and offices in the country that charges the least for workers with the skills they are looking for. In other cases, they just access those workers through the internet. Low-cost workers with high skills stay in their low-cost country and contribute to the work of teams, many of whose workers live in high-cost countries.

That is a game that workers in any country can now play. But here's the catch. Workers with low skills in high-wage countries are right in the bullseye of this process. No one wants them, because employers can now get workers in the low-cost countries with the same skills and pay much less for their services.

From the middle of the 19th century to the decades immediately following the end of World War II, the U.S. had the best-educated workforce in the world. That fact, unmentioned by Greenspan and Woodridge, played a very important role in powering the U.S. to its dominant position in the global economy following the war. 

But that is old news. Many countries that had very high rates of illiteracy after the war, like China and Vietnam, managed to create mass education systems that are even more effective than ours in the United States at giving their average factory and office workers what we call basic skills. While wage rates have been growing fast in those countries, almost all still charge much less for their services than similarly skilled U.S. workers. That fact lies at the heart of the challenge we face now.

Greenspan and Woodridge are wrong. The slow growth in American productivity since the 1970s was not caused by increasing regulation and increased spending on social programs. There are other countries with more regulation and more spending on health benefits and social security than the United States that are doing just fine. It was caused by an increasing mismatch between the skills employers needed and the skills offered by the American workforce, particularly those who graduated from high school in the lower half of their class. The beginning of the slowdown in productivity growth pretty much matches the point at which American employers—like employers all over the world—gained access to the newly literate workforces of countries paying much lower wages. That is why the iPhone is made in Asia and not the United States. Yes, the iPhone could be made in the U.S., but if it was, the cost would be much higher and the market for it would collapse, taken from Apple by Samsung and its Chinese competitors.

It is hard to overstate the challenge or its importance. The OECD's most recent study of the skills of workforces in the most developed countries was analyzed by ETS, which found that the millennial workers surveyed in the United States had lower levels of basic skills than the workers in all the other countries surveyed. The United States is trying to maintain its leadership in the global economy with the worst educated workforce in the developed world. In an age in which skills matter more for economic outcomes of all kinds than ever before, we have set ourselves up for failure on a grand scale.

The United States has a choice. Either we greatly raise the skill level, especially in the lower ranges, of the American workforce to the levels routinely produced by the countries with the best education systems, or watch other countries, one by one, overtake our economy and our ability to provide a high standard of living for our people. It's that simple.

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