Better matching of talent, capital is key to renewed US prowess

This is the concluding article of a three-part series. Part 1 was When the US risks being leapfrogged, and Part 2 was How the US R&D model was weakened.

Part 2 of this series showed that with the disappearance of labs from major US corporations, venture capital and segments of the financial sector cooperating with governments, the military and universities became keys to successful research and development, with the commercialization of innovation competing to match selected talents and teams with capital. 

In simple words, rather than once large, vertically integrated corporations matching – and mismatching – talent and capital with various projects, the matching was “outsourced,” and competing VC firms, investment banks and other institutions played increasing roles in matching capital and talented teams with projects. 

This new model had one big advantage: Competing outsiders combined and priced projects rather than corporate managers, thus mitigating the influence of companies’ internal politics. But the success of this model depended on the financial sector having access to well-scrutinized pools of talent, since the selection process that had previously been managed internally by corporations was less prevalent.

This is where the education sector comes in, and it is this sector that has become over the last few decades the weak link in this crucial matching process. For the new model of deepened capital markets – which is one of America’s strengths – to sustain the country’s entrepreneurial/innovative prowess, repairing this sector is key.           

The successful Israeli experience, partially summarized in Part 2 with more to come below, shows that besides drastic changes in government policies, the speed with which Israel overcame mismatches was due both to the discipline and the networking that mandatory military service prepared the country’s youth for, and to the country getting an influx of 300,000 technically capable migrants within three years.  

The US cannot replicate such speed, since Israel’s population at the time was only 4 million, which would be the equivalent of the US having within three years an influx of 30 million skilled people. However, institutions to bring about both greater discipline and better selection of skills can be restructured so as to restore America’s entrepreneurial and R&D prowess. 

It is in matters of discipline and the mismatching of talent and capital where the US has been pulling the wrong way over the last few decades. Yet recall a quip from the movie Adam’s Rib, “Without discipline, there is no life at all.”       

True, discipline starts at home and at school. Much has been written about the disintegration of families, fatherless black American households in particular (predictably, with some 500,000 young blacks languishing in prison, and community ties much weakened). 

Prison reform and controlled legalization of certain drugs might mitigate the problem, but would take time. Restoring stable households is harder than restoring discipline in educational institutions because the latter are clearly delineated, whereas “families” are not – which is another reason I focus on solutions to correct mismatches in education, drawing on experience.     

Education: correcting for misallocated talents 

As with R&D, the problem with education is not a simple matter of “public” versus “private,” but has to do with drastic cultural changes too.  

Public schools worked well in the United States and other Western countries until about the 1970s. One reason public schools performed well was cultural: The vast majority of highly qualified women had few options for working outside the home other than as – much respected – teachers and nurses. Women accepted relatively low pay and difficult working conditions, and gave their best.

After women’s liberation opened up professional opportunities for women during the 1960s, along with changes in divorce laws, some of the best abandoned teaching. 

Of course, dedicated, smart women did stay in the sector. But increasing bureaucratization, government and union constraints, and faddish theories of education shifted the selection for top positions in schools toward credentialed administrators rather than drawing them from pools of skilled teachers – mostly women – who understood schools far better. 

These changes made a teaching career even less attractive to talented women. 

Far from promoting women’s ability to acquire organizational, financial and managerial skills to be eventually leveraged to other sectors, the government-controlled education and health sectors prolonged gender inequality, leading to women’s under-representation in the top echelons of business.

And, with critical masses of talented women leaving the education sector, public schools’ performance plummeted – not unlike the corporate labs, when their smart scientists and engineers exited, as discussed in Part 2.  

Georges Doriot, who played crucial roles in shaping the US venture capital sector, was criticized for his views during the 1960s when he dismissed the idea that women could play significant roles in the VC sector. Estimates are that women still do not occupy senior positions in top venture capital firms. Yet such opinions and facts should not be surprising, nor do they necessarily reflect discrimination.  

As noted, women working outside the home well into the 1960s were primarily teachers or nurses. Venture capital firms could not remedy women’s consequent lack of both experience and networking that their businesses depended on.

Also, even today, less than 25% of women study science and engineering at American universities, and it is not clear what this implies for the financial sector: Many women may be choosing these fields to pursue careers in teaching, rather than in business, technology or finance. 

An anecdotal evidence, when I earned my Bachelor of Science at the beginning of the 1970s, the mathematics department had two programs. One was a “regular” math program with 150 (mostly female) students enrolled, and an “advanced path” with 70 students, where there were only five women.

Those going for the regular math degree wanted to become math teachers. True, some went on to complete PhDs in the pedagogy of math and science. But the venture capital sector has little interest in such qualifications. Thus statistics about women’s graduation rates in STEM (science, technology, engineering and mathematics) do not necessarily imply that they are a good match for VC firms or investment banks.

This brief historical reminder suggests that a major obstacle for women getting into the top echelons in venture capital, finance and business has been that in educational fields where women should have been able to break “glass ceilings” a long time ago, they could not, as this sector was steered by bureaucracies, interest groups and politicians for narrow self-interest.  

If that were not the case, by now women could have leveraged their vast and detailed experience in schools, be it as funders, chief executive officers, or chief financial officers, to other sectors.  

The US can still correct for women’s unused potential by “de-bureaucratizing” and “depoliticizing” education. With the return of better-qualified teachers and administrative staff to schools, students would come to respect them and what they are being taught again and, in time, become more disciplined. And such youth are America’s future.   

As of now data concerning education at all levels show a dismal trend of disastrous mismatches in this crucial sector – which, if corrected, would offer significant opportunities.

Credentials not backed by know-how

Consider America’s reported 83% total high-school graduation rate: The number looks good, but at closer examination it says nothing about how much the graduates actually learned. 

A 2015 New York Times article presented statistics from a high school with a thousand students whose graduation rate jumped from 65% to more than 80% in four years. Yet in postsecondary entrance exams, only 10% of these students were found ready for college-level work in reading, and only 7% were ready for entry-level college math. 

Across all US schools, only 40% of 12th-graders, on average, were ready for college work in reading and math. This number illustrates a downward trend since 2002, when the National Center for Education Statistics noted that 35.5% of first- and second-year undergraduates had to take remedial courses in reading and math. 

Graduation rates have become inflated since then in California, South Carolina and Tennessee, as authorities eliminated requirements that students pass exit exams before getting their diplomas. Alaska, California, Wisconsin and Wyoming demand fewer credits than other states. Thirty-two states do not require graduates to take four years of English and math.

Texas reports the nation’s second-highest graduation rate and the highest in the nation for blacks and Hispanics. But a closer look shows that the figures exclude tens of thousands of students because schools report that they have left the country or are being home-schooled, even though they may have just dropped out. As there is no documentation required, nobody knows.

Elsewhere, students at risk of not graduating from regular schools are given the option to “recover credits.” In Detroit, more than a third of the students at Cody Medicine and Community Health Academy, for example, are in credit-recovery programs. 

With incentives to improve graduation rates, teachers and schools are moving their non-performing students to for-profit programs such as K12, National High School, and others, where they can get the necessary high-school credits. 

Daria Hall, a director at the Education Trust, acknowledged: “Some of these credit-recovery programs frankly aren’t terribly rigorous and aren’t preparing students well for what’s next.” In Camden, New Jersey, almost half of the area’s high-school seniors graduated through an appeals process because they could not pass the required final exams.

Using data from the 2010 Digest of Education Statistics, Eric Hanushek of Stanford University analyzed student enrollment and teacher and staffing levels at US public schools between 1980 and 2008. He found that staff and teacher numbers grew roughly twice as fast as student enrollment over this period. Yet while school staff increased 52% and student enrollment by 21%, students showed no evidence of additional learning in achievement tests.  

In short, improvement in high-school graduation rates does not reflect knowledge gains, a good match between spending and teachers’ and students’ skills, and bodes ill for matching graduates with skills that employers require. How can a young person lacking in literacy or numeracy be expected to succeed in a digital world?  

Universities too have dramatically increased administrative personnel and costs. Within these institutions the extra administrators have achieved almost nothing either, as Richard Arum and Josipa Roksa show in their Academically Adrift: Limited Learning on College Campuses (University of Chicago Press, 2011).

They note that gains in critical thinking, complex reasoning, and writing skills have either been exceedingly small or non-existent for a large proportion of American students, with 36% experiencing no significant improvement in learning whatsoever.

Pre-kindergarten programs have shown poor results too. In Georgia, for example, fourth- and eighth-grade reading, math, and science scores all trail the national average; one in three teenagers drops out of high school – the third-worst rate in the country. This occurs in spite of the fact that, since 1995, the state has subsidized free pre-kindergarten programs, as some continue to theorize that such financial arrangements produce tangible results in student performance later.  

Yet the results are in for Lyndon Johnson’s Head Start program launched in 1965: The Health and Human Services Department published a 346-page report in 2012, comparing those who went into Head Start with those who did not, and found no measurable differences.

All the above evidence notwithstanding, recent changes continue to pull the US in the wrong way in its ability to lead to better selection of talent, as the following case shows.

Although San Francisco’s Lowell School has succeeded in giving thousands of, among others, poor immigrant children the chance of an elite education, the San Francisco Board of Education has now banned it from using admission tests and introduced a lottery system instead, with school board commissioner Alison Collins declaring that selection by merit is “racist.” 

Perhaps Collins vaguely remembers ancient Athens’ “democracy,” where indeed, candidates for public office were chosen by lottery. However, that lottery was not quite “democratic”: The lots were drawn from a pool of a small number of select people.   

The trade schools solution 

The experiences of different countries not only offer answers to the question about how to restore better matching of skills and capital in the education sector, but also help solve a problem Henry Kressel and others, whose research was discussed in Part 2 of this series, brought up when discussing America’s weakened technological prowess: the disappearance of part of its manufacturing base. 

One of Kressel’s examples is the loss of domestic control over an industry that, according to him, was vital to the US: the sale of Westinghouse’s nuclear-energy division to Toshiba.  (Though, as with the Rockefeller Center deal mentioned in Part 1, by August 2018, Brookfield Business Partners bought it back from Toshiba, and by February 2021 was considering selling all or parts of it.)

Still, restoring manufacturing these days requires not only engineers and computer scientists specialized in logistics, but a team of good technicians to surround them. Where would they come from?

The Swiss and Israeli school systems provide answers. After primary education (up to Grade 8), students are sorted according to their abilities, some going to high schools (with streams in science, math, and the humanities), while others go to trade or vocational schools that collaborate with related businesses.

Adolescents whose talents and interests are not in general studies are not prolonging their “general” schooling, something that is detrimental to real education and discipline – boredom is a source of vice. Nor does this dual system close doors for late bloomers: If some change their minds and want to go to university, they can pass a few exams later and apply.

Letting young adults gain experience in various trades does not imply either that such students end up earning less money, or become less well versed in history, philosophy and arts (they can study such topics during their leisure time, with a variety of distance learning, some offering credentials, others not, which they may be able to afford more of if they are not forced to spend exorbitant sums on credentials). 

It is not true that such a dual system creates or sustains inequality. On the contrary.

Experience in occupational fields improves employment prospects and social mobility. In Switzerland, 70% of young people aged 15 to 19 are training for occupations, whereas the figure in Germany is 65%, and in Austria 55%. 

In these three countries, youth unemployment rates are less than half of America’s 16% (and measures of wealth distribution, superficial as they might be, show that they are, relatively, among the more equal), and the countries are also known for having retained their manufacturing base.  

In 2012 the UK created apprenticeship programs for commercial pilots, lawyers and engineers, adding to the existing program for accountants, the programs now being considered equivalent to college education. 

In St Louis, a technology entrepreneur, Jim McKelvey, convinced several large employers, including Enterprise, Monsanto and Rawlings, that computer programming does not require a college education but rather working with an experienced programmer. These employers created an apprenticeship program called LaunchCode. The program admits young people with basic programming skills, pays them $15 an hour, and pairs them with experienced programmers for two years.  

Briefly, what all the above data show is that there are plenty of solutions to remedy the mismatches in the US high-school education system and prepare the future generation to fit better with the demands that an entrepreneurial/R&D-bent society requires.    

It turns out that postsecondary education suffers from drastic mismatches too, due to downgrading of standards at lower levels of education. 

Mismatched academia 

In a June 13 blog piece titled Meritocracy, John Cochrane of the Hoover Institution shows the prosperity-reducing impact when educational institutions give up on selecting students based on abilities. He quotes Adrian Wooldridge, a columnist at The Economist, as describing this case:

“The City College of New York had a well-deserved reputation as the ‘Harvard of the proletariat,’ taking thousands of poor adolescents, many of them the offspring of immigrants, and turning them into the successful citizens of a knowledge society – doctors, lawyers, academics and, in the case of 10 alumni, Nobel Prize winners.

“Then in 1970 the university introduced an open-access regime, admitting anyone who had graduated from the city’s high schools. The result was a simultaneous boom in student numbers and a collapse in academic standards.

“By 1978, two out of three students admitted to the college required remedial teaching in reading, writing and arithmetic. Dropout rates surged. Talented scholars left. A college that had once specialized in producing the rocket fuel of a successful society – talent – became synonymous with protests and sit-ins.

“In 1999, a task force led by former Yale president Benno Schmidt pronounced the larger City University system to be ‘in a spiral of decline.’ The college only began to recover after it abandoned open admissions as a failed experiment.” 

Aggregate data confirm the above sequence of events: 60% of white males (and 65% of black males) do not graduate within six years of starting college (for women the numbers are 35% and 43% respectively). 

Combine these numbers with the “real” rather than inflated high-school dropout rates, and the stark conclusion is that – as with “R&D” and “infrastructure” – spending more on education does not create “assets” but, under the present institutional arrangements, either just redistributes incomes under new names, or worse – creates liabilities. 

The liabilities include not only the debts that students or their parents incur – not backed by future incomes – but the risk of frustrated young generations, indulging in prolonged adolescence and having high expectations left unfulfilled. These leapfrogged youth, led like a herd to believe in the power of credentials, end up predictably blaming discrimination or the “system” for their lack of success.

As of January 1, 2016, 43% of the roughly 22 million Americans with federal student loans were not making payments, and one in six borrowers (3.6 million) were in default on $56 billion of student debt.

Also, a report from Pew Research Center shows that 26% of millennials (defined as those born in 1981 or later) lived with their parents, up from 22% in 2007, percentages that translate to 16.3 million young adults living with their parents, compared with 13.4 million in 2007. 

The changing living arrangements are attributed to mismatches in what millennials studied and what job opportunities are out there, as well as to the debts millennials took upon themselves. Among other things, these data also imply that the American education system is not ensuring greater social mobility and higher incomes. 

The frequently cited association between diplomas and higher incomes may just be a correlation reflecting the fact that smarter people study harder, and study harder subjects; that purchased educational credentials are skewing talent selection; that until the 1970s, US graduates faced little global competition; that universities were heavily subsidized, directly and indirectly since the National Defense Education Act of 1958 (as noted in Part 2), and bureaucracies were expanding hiring people with credentials backed by – based on the above evidence – not much.  

The late social philosopher Eric Hoffer, a keen observer, saw the compounding impact of these events 50 years ago. He wrote then in the pages of The New York Times that the newly accredited “social doctors” would “want to influence affairs, have a hand in making history, and feel important.” 

And, while working people “know that at present money cannot cure crime, poverty, etc, the social doctors go on prescribing an injection of so many billions for every social ailment” – which was not the solution in the 1970s when he wrote this and has not been since.

The increasing inequality in the United States and other Western countries might be partly explained both by the increasing competition after the 1970s from around the world and, paradoxically, by the increasingly mismatched domestic education sector. 

The best and brightest and those who pay for private tutoring benefit most from government subsidies. On the other hand, the US government offers no subsidy to someone who is not thrilled about studying in school but gets excited tinkering with cars or computers and opens a garage or a small business. The studious kids gets the subsidies for educational credentials, while the ones without high-school diplomas or university degrees start working and paying taxes. 

Inequality increases and the distribution of wealth becomes more skewed: One person compounds massive educational subsidies and turns them into wealth. Add to this the fact that lower-skilled – and increasingly mid-level – employees too have faced increased competition since the 1970s from the rest of the world, and inequality becomes even more pronounced. 

The consequence is raising a generation that had expectations that credentials are the solution for upward mobility. When their hopes are frustrated, they will predictably blame the “system”: After all, the American Dream and the country’s stability drew not simply on prosperity, but even more on social mobility. If this does not happen, people bet on other models of society.            

The US advantage   

Restoring selection at all levels of education is thus critical if the US is to regain its entrepreneurial and R&D prowess: Without it, how can the US financial sector deploy the capital it was trusted with?     

With more than 7 billion people now roaming this planet (up from roughly 1 billion a century ago) and new technologies speeding the connections among them, impacting each and every industry, having a well-prepared, disciplined, flexible pool of talent is key.   

The United States’ advantage and ability to correct mismatches faster in response to innovations – thanks to its deep financial sector – can only be sustained if the redeployment of capital is coordinated with access to a pool of critical masses of what I have often called “vital fews” and their teams.  

And the teams are necessary: In sports, stars without well-prepared teams cannot achieve much, just as in a tech company no matter how bright the scientists or the engineers are, they cannot go far without a team of technicians knowledgeable in manufacturing. And, as in sports, education and layers of institutions making selections based on specific skills so as to be able to build teams and networks are a must.

As shown in this series, the US has been gradually eliminating features of its educational institutions that made such selection possible. This is at a time when China, which is now feared to leapfrog the US, has been insisting on rigorous selection in its educational institutions.  

Although observers of China note that the Communist Party continues to rule the country, and claim that an elite wants to ensure that their offspring can stay in positions of power (though some make the latter observation of the US now too), they also admit that China’s education system from nursery schools to universities is determined by standardized tests to select the best scientists and engineers, and perhaps some government officials as well.

The US, though, has the advantage of its deep financial sector, which China cannot have as long as it keeps its party monopoly. After all, the party still controls China’s government – which remains its main financial institution. A deep financial markets disperses power – and that, as of now, is not China’s model of society. 

Thus, in the midst of much US pessimism and talk about the country’s decline, perhaps the analyses in this three-part series offer a more optimistic take.

Restructuring educational, government, and military institutions (and perhaps adding others, such as obligatory national service where the young could both build networks other institutions now no longer offer acquire more discipline) would bring about better matches among America’s pools of potential skills and talents, and cooperating with its deep capital markets would leverage them.

By sticking to its one-party system, China is giving the US time to carry out these changes.     

This is the concluding article in a three-part series that draws on Reuven Brenner’s books History – the Human Gamble (University of Chicago, 1983), Labyrinths of Prosperity (University of Michigan Press, 1993) and Force of Finance (Thomson/Texere, 2002), and a series of recent articles in American Affairs and Law and Liberty.