The New “Human Capital Century”

IN THE PAST, good jobs and high incomes were tied to the large-scale production of manufactured goods. Factories were the places where economic value was created. But today little value remains in the production of goods that anybody can make. Good jobs and salaries increasingly come from the production of new ideas, new knowledge, and new technologies. This shift will continue and probably accelerate in the future. In the coming decades, global competition will be about attracting innovative human capital and innovative companies. The importance of geography and the forces of agglomeration in determining the location of human capital will keep growing. The number and strength of a country’s brain hubs will determine whether it will prosper or decline. Physical factories will keep losing importance, but cities with a large percentage of interconnected, highly educated workers will become the new factories where ideas and knowledge are forged.

Is America ready? Yes and no. The country’s economy is strong in many ways. Its labor market remains among the most efficient, flexible, and meritocratic in the world. It rewards personal effort and risk-taking more effectively than most other countries. This is a crucial advantage in attracting top talent. Moreover, for all our recent problems, America’s capital markets and venture capital system remain among the most efficient anywhere, providing financing to innovative entrepreneurs with good ideas and a willingness to work hard. As we have seen, this makes a huge difference for the creation of local businesses. Most important, because of its dynamic brain hubs, the United States is well positioned to continue to generate innovative activity.

 At the same time, our economy has some serious flaws. These flaws are probably not too surprising, because they are to some extent a reflection of our national character. As a society, we are much too focused on the present at the expense of the future. Our culture glorifies instant gratification and quick results, and it shuns long-term commitment. Most of the energy and attention in our policymaking is concerned with short-run issues, such as how to stimulate the economy over the next six months or how to deal with this week’s employment numbers. While short-term issues can be pressing, their importance pales relative to that of long-term ones, because the latter are the ones that really affect our standard of living in profound and permanent ways. The magic of compound growth means that even tiny differences in growth rates can have enormous consequences for our future jobs and incomes. Thus, policies that can increase growth even marginally are vastly more important than any short-term fix to the economy. Our ethos of immediate reward and our almost structural inability to take responsibility for long-term problems is leading us to underinvest in our future. If left unchecked, this tendency could have truly disastrous consequences. The effects will be felt most strongly by our children and by the least fortunate in our society.

In particular, two structural weaknesses that have emerged in the past three decades severely limit America’s economic poten- tial and create serious social imbalances in our country. Human capital and research are the engines that sustain the American economy and its workforce. As we have seen, some American cities are lacking in both. But the problem is bigger than that. The United States as a whole is not investing enough in human capital and research. As a consequence, our salaries are not growing at the rate they used to, and inequality is increasing.

In Chapter 6 we examined the role of place-based policies in helping to level the playing field. In this final chapter we look at what America as a nation should be doing to regain the strength that made it the dominant economic player of the twentieth century. These reforms are crucial for our future as a society, because they will affect our capacity to grow for decades to come.