The Thought Office

The shocking data published by the US Census Bureau on 13th September 2011 revealed that 15.1% of the population were under the poverty threshold in 2010. This has only added to the angst felt by President Obama as he struggles on several fronts to steady his ailing campaign for re-election. However, when the Eurozone is teetering on collapse, the Republicans remain recklessly obdurate on the deficit, and economic growth falters, we all expect the figure to force some hard rhetoric before being swiftly swept under the carpet.

Perhaps it isn’t an immediate concern, but such a high level of poverty is unacceptable - especially in a “developed” nation such as the USA. Setting aside the moral arguments to act against poverty, it is in all Americans’ best interests economically to reduce the figure. A greater poverty rate suggests more Ameirans are claiming benefits. And as we all know after weeks of furious debates between the Republicans and Democrats, Washington is spending well beyond its means. Therefore spending cuts or tax hikes are likely to ensue in order to correct the balance, leading to a lowering of all individuals’ living standards.

Beyond the government, poverty is damaging to the long-term productivity of the economy. Poor health and sub-standard education are usually part and parcel of poverty because households are unable to afford healthy foodstuffs, or move to areas with better quality schooling. Consequently, the quality of labour falls as individuals have less “human capital” and suffer from illness more often. And since the poverty rate is so high, this loss of productivity represents a large proportion of the future workforce.

The simplest solution to many of President Obama’s problems is sustainable job creation. This involves attracting investment based on the USA’s long-term advantages rather than temporary or near-sighted factors such as low interest rates or subsidies. Acting on poverty now will help towards making the USA’s labour force more desirable to businesses and investors. Besides, reducing poverty is a must if the government are to make spending more sustainable in the future as this would reduce stress on Medicaid and incease revenues.

Although Obama has recently unveiled his new plan to stimulate job-creation, it suffers from being overtly short-sighted. Just like Obama’s previous stimulus package, I don’t believe that the new plan will produce enough jobs to justify it’s massive bill. Instead, if Obama was to channel spending towards reducing the poverty level by improving the quality of schooling in deprived areas, funding training for the long-term unemployed, encouraging healthy living and providing some childcare support so that households can increase their earning potential.

Moreover, the total benefit of improving the supply-side of the economy will far exceed the initial government investment as there is no lack of possiblie funding. Internationally, venture capital firms have raised enormous sums and are looking to invest in countries with a positive long-term outlook. My proposed plan would reduce some uncertainty surrounding taxes as a large factor of increasing spending currently, Medicaid, would be restrained and revenues would rise due to greater earnings. Moreover, the USA’s workforce remains more highly skilled than in emerging economies. In addition to its (comparative) political stability, the new American model would prove particularly potent.

In the UK, where tuition fees have risen dramatically from around £3000 to £9000, resentment for the coalition has grown similarly. But can the state afford to keep subsidising the cost of degree-level education? Why does the state even become involved? And could the private sector offer any alternatives?

Bulging Government Debts

Western governments expanded their spending in the aftermath of the financial crisis in 2007-08, taking up the slack from weak consumer demand. However, the economic climate remains precarious. And the big stimulus packages which leaders had bet on now leave them grossly over-stretched.

At this time, most policy makers would have expected to be well into a healthy recovery. This would raise tax receipts, bringing governments’ balance sheets back into order. Unfortunately, we are still stuck in these economic doldrums with anaemic growth across the developed world and the continuing euro saga. All of this has highlighted how governments are spending well beyond their means at a significant cost to future growth prospects.

George Osborne, the chancellor of the exchequer in the UK, has reduced government investment into tertiary education, leading to higher tuition fees. This has caused considerable angst amongst students, leading to the severe riots earlier in the year.

The problems with high tuition fees

Higher fees means those from poorer backgrounds are less able to benefit from a university education. Moreover, those who do go on to study at university-level will be shackled to a massive debt burden for a significant proportion of their adult lives.

Especially after the housing bust, prospective home owners will be asked to place a much greater down payment. With such large student debts, many young people will struggle to find good mortgage terms and subsequently get their foot on the housing ladder. As a result, some economic commentators have raised concerns that in the medium-term, people will be less affluent than the previous generation - breaking what many people see as the nation’s social contract.

Hiking tuition fees will exacerbate the rich-poor divide. Students from wealthier households would be able to afford the greater cost of university and benefit from the higher salary later. This contrasts to poorer students who, deterred from higher education due to the enormous costs, would earn far lower salaries than their more affluent counterparts.

Let the private sector step in

The main reason that governments become involved in improving the education of their citizens is that more knowledgeable, evaluative and critical individuals offer positive externalities - that is, benefits to wider society along with the individual who receives higher-education. More educated individuals earn more, providing larger tax receipts which governments can use to improve social infrastructure; graduates are also meant to be an innovative bunch, hopefully providing new goods and services that improve our quality of life.

Although the government may cut spending on education, that doesn’t mean that the provision of education at a higher level will fall. I propose that the private sector step in to sponsor individuals. Firms would be willing to support students if they assume a job at the company after their education or training.

This would allow poorer, but still able, students to benefit from degree-level education. Moreover, it would allow the supply of graduates to better meet the demand of businesses, providing a more productive labour force. Especially now when there is a massive shortfall in the supply of graduates in Science, Technology, Engineering and Mathematics degree, private firms would offer sponsorships drawing capable students to courses which are in actual demand.

Allowing the private sector to assume some of the roles of the state in providing education resources is certainly an untested policy area in recent years. Perhaps now, when governments are on the brink of bankruptcy, encouraging such schemes - which would ease the pressure on the state - has very little to lose.