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Smart Money: Education and Economic Development

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Smart Money

July 2004 | EPI Book

Smart Money

Education and Economic Development

by William Schweke

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Table of Contents | | Executive Summary | Introduction

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Table of contents

Executive summary

INTRODUCTION

CHAPTER 1: What Is Economic Development?

CHAPTER 2: Why Investment in Education Matters

Does education contribute to economic development?
Education and earnings
Education spending and the quality of growth
The social costs of inadequate educational and workforce preparation opportunities

CHAPTER 3: Investing in what works
Why does investing in pre-K matter to economic development?
Primary and secondary education
Community colleges

CHAPTER 4: How to invest more in people
Reforming school finance
Why business incentive programs must be reformed
The need to modernize state revenue systems

CHAPTER 5: Attaining the prerequisites for a high-wage, high-performance economy
Developing a lifelong learning system
Creating a high-quality revenue system

CONCLUSION

Endnotes

Bibliography

Titles of particular interest to educators from EPI

About EPI



Executive summary

Strong economies compete on the basis of high value, not solely low cost. Yet in the United States, growing economic disparity hinders the nation’s ability to provide the high-value-added products and services necessary to compete in a global marketplace. The economic problems associated with unequal growth – stagnant wage growth and depressed market demand – in turn exacerbate social problems, such as crime, drug abuse, gangs, reliance on transfer payments, and family break-ups.

The most forward-thinking approach to solving these problems and increasing competitiveness is to equip today’s and tomorrow’s citizens with the skills and attitudes for economic and civic success in an increasingly knowledge-based economy. Yet education funding has been losing ground over the past several years, at a time when the knowl-edge-based economy demands an increasingly higher set of skills and when growing numbers of public school students are minorities or new immigrants.

A compelling body of research links primary and secondary education to economic development and growth. This research recognizes people as a type of economic asset – “human capital” – and shows that increased investment in health, skills, and knowledge provides future returns to the economy through increases in labor productivity. Education increases workers’ average earnings and productivity, and it also reduces the incidence of social problems such as drug abuse, crime, welfare dependency, and lack of access to medical care, all of which can weigh heavily on the economy.

Research confirms the value of investing in educational programs, curricula, technologies, skills, and infrastructure, particularly in the areas of:

Pre-school. Longitudinal studies calculate a significant return on investment for preschool education as well as net public-dollar savings due to the decreased likelihood for preschool participants to repeat grades, require remedial education, be incarcerated for crimes, and become dependent on welfare. Many states are moving toward offering subsidized preschool, particularly for at-risk children, but funding these programs remains a challenge.

Primary and secondary education. Research shows that a high-quality education increases the earnings of individuals and the economic health of their communities. Some believe, however, that increased public investment will not necessarily improve the quality of education offered. But recent studies show that education spending can have a direct, positive impact on the business climate and can improve the success of at-risk students, whose contributions to the economy are critical for achieving a high-value/high-wage economy in the 21st century. Such spending will have a greater chance of success if coupled with specific reforms, such as smaller class sizes, greater access to technology for at-risk students, support for teacher training and innovation, and improved accountability structures.

Community colleges. The rate of return on community college education is positive; those who attend community college earn significantly higher wages than those who stop at a high school diploma. Because of their low cost and lack of requirements for admission, community colleges have become the postsecondary organizations that many disadvantaged groups use to gain access to employment. Thus, community colleges are well-positioned to help bridge the educational, wage, race, and class divides in America.

Supporting this continuum of programs will require a financial commitment. Given the significant return on investment that a productive education and training infrastructure can bring, federal and state governments need to take a leading role and a long-term perspective. Such a long-term and forward-thinking perspective demands courageous reform of the current tax system. Specifically, states and localities need to consider these strategies:

  • curb the use of business incentive programs, which give businesses economic breaks but do not guarantee local job creation or economic growth;
  • halt the use of corporate tax-sheltering loopholes, which are eroding revenues generated by state corporate income taxes;
  • modernize state and local revenue systems to be more efficient, effective, customer-friendly, and accountable.

If the United States is to achieve a higher and more shared standard of living, U.S. firms must compete on the basis of new, higher-quality service and production approaches that utilize new technologies and a more skilled workforce. Economic developers call this the “high road.” Taking the high road will require that the nation develop a more seamless, well-endowed lifelong learning system; reform wasteful business incentive programs and redirect the resulting savings into education or other state priorities; and create and maintain a modernized, high-qual-ity revenue system.

States and localities must find ways to encourage more of their employment in high-value sectors and workplaces. A high-quality education and training continuum, while not alone sufficient, is a necessary condition for meeting this challenge.




Introduction

Strong economies compete on
the basis of high value, not solely low cost. A nation or a state that offers a skilled labor force, modern infrastructure, and a high quality of life, yet has relatively higher taxes, can hardly be called anti-business. Yet in the United States, where inequality in earnings and wealth has been increasing for two decades, growing economic disparity is hindering the nation’s ability to provide the high-value-added products and services necessary to compete in a global marketplace. And as wages for working people stagnate, families struggle to make ends meet, and market demand falls. Economic problems, in turn, exacerbate social problems, such as crime, drug abuse, gangs, reliance on government assistance, and family break-ups. To ameliorate these weaknesses in the social fabric, public funds that might otherwise go toward productive investment are spent instead on crime control, drug treatment, and income support programs.

Prevention is almost always cheaper than treatment. If we do not invest now, we most certainly will pay later.

The most forward-thinking approach to solving these problems and increasing U.S. competitiveness is to equip today’s and tomorrow’s citizens with the skills and attitudes for economic and civic success in an increasingly knowledge-based economy. There is a growing consensus that money spent wisely on education pays off not only for workers but also for communities and businesses. Educational attainment raises incomes and increases productivity, while failures in educating the workforce are associated with higher levels of crime and welfare dependency.

Today American states and elected officials are faced with fiscal crises that sometimes lead them to cut the funding streams for these public services. Over the long haul, however, states will position themselves better if they develop practical, long-term plans for sustained investments in education, workforce preparation, and retraining. A key element of these plans must be increased accountability in school spending, reform of the tax systems that finance education, and reform of business tax incentive programs that siphon away revenue for no productive purpose.

Investing wisely in education generates real, quantifiable results for workers, businesses, and society. If people are tied to low-paying jobs and unable to acquire skills needed by employers, productivity grows more slowly. If businesses do not have a workforce that is appropriately educated, they will be less competitive with their overseas rivals. If citizens do not have what it takes to succeed in today’s economy, they will feel threatened by economic change and are much more likely to recycle back and forth between unemployment insurance, welfare, and poorly paid, insecure employment. Finally, the spreading number of low-paying jobs breaks a longstanding social contract under which most people work: “If I work hard, I will be able to keep my job, support my family, and enjoy a growing income.” Quality education is a critical tool for upholding this implicit contract.



About the Author

William Schweke is the research director for the Corporation for Enterprise Development (CFED); he is based in the organization’s Durham, N.C. office. CFED is a nonprofit organization that creates economic opportunity by helping the poor save, invest, succeed as entrepreneurs, and participate as contributors to and beneficiaries of the economy. The organization identifies and researches promising ideas, collaborates with the public and private sectors to test them, and helps drive the application and adoption of proven concepts. Established in 1979, CFED works nationally and internationally through its offices in Washington D.C., Durham, and San Francisco.


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