Human Capital, Inequality, and Justice Between Generations

Douglas Holtz-Eakin is a Republican economist and a former director of the Congressional Budget Office. He wrote a recent editorial for The New York Times that advocated a dramatic reversal of traditional US policies toward reducing inequality. Holtz-Eakin thinks that Americans can “make their own safety nets.” Instead of giving the elderly entitlements to retirement income and health care, we should give the young an entitlement to a good education.

There’s a strong case to be made for this, but it poses significant problems of inter-generational justice.

The background question is: What can we do about increasing social inequality in much of the developed world? Holtz-Eakin believes that

The seminal economic event of the early 21st century is the entry to the global labor market of billions of workers in China, India, and elsewhere around the globe. The simplest economics suggest that this plentitude will lower the earnings of unskilled laborers and raise the return to higher-skilled workers and capital investment. This is bad news for poor wage-earners and an advantage to those with human and financial capital.

This surely an important cause of increasing inequality, although it also seems likely that developed-world policies reducing progressive taxation and de-unionization also contributed to inequality. Whether Holtz-Eakin would agree that these are relevant historical causes is unclear. What he does think is that it is futile to attempt to cure inequality through redistributive taxation or revived labor politics. Instead,

A better strategy is to harness these very forces by building human and financial capital. The merits of fundamental reforms to the K-12 education system that emphasize choice and competition that reward performance and attainment are no longer a source of partisan divide. But a more thoroughgoing focus on building human capital at every stage of the career is necessary.

What Holtz-Eakin means by “building human capital at every stage of the career” is uncertain. He could be endorsing the elementary and secondary school reform platform shared by both George W. Bush and Barack Obama. He could also mean a commitment to supporting human capital development from the pre-natal period until secondary school graduation, as championed by James Heckman. This is more expensive, but a significant body of research in child development supports Heckman’s belief that the return on investment from early and sustained intervention is far higher than what can be achieved through school reform alone. Either way, Holtz-Eakin is advocating a radical reversal of social policy:

From a budgetary perspective, the goal should be not only to rein in the over-promises of existing entitlements, but also to reverse the basic strategy. Why provide an entitlement for retirement income, health care and elder assistance? Why not provide the entitlement early in life so that pre-K school, primary education, nutrition and preventive care provide the capacity for strong returns to human capital and the capacity to finance those same old-age needs in a vibrant market setting?

The idea is, on the one hand, to invest resources early in life so that youths are more productive when they transition to the labor market. On the other hand, once they do enter the labor market, the safety net should be restructured to provide incentives so that “will not overstay their time on unemployment roles or other support programs.” It makes better sense to spend social resources on a youthful entitlement than an elderly entitlement because highly-skilled youths will be better able to earn enough to take care of their own futures, while benefiting everyone else through the spillover effects of their increased human capital

I agree with much of this. Let’s stipulate that comprehensive early intervention programs and thorough reform of public education could produce a generation of workers with significantly social and cognitive skills. If so, this should produce a generation of workers with higher average income relative to the counterfactual of continuing under status quo social policies. These workers should, on average, be less in need of redistributive governmental programs, if that is your policy goal. Or, they will be better able to pay taxes to support such programs, if that is your goal.

However, Holtz-Eakin needs to address two significant problems with this scheme. First, we have no assurance that even a successful boost to the average human capital of workers would eliminate the need for a safety net. Not everyone succeeds in even the best schools, and fate brings down even the gifted. More importantly, we have no idea what kind of shocks will effect the future economy. We are about to see many driving jobs be replaced by autonomous vehicles. What will happen to truck and taxi drivers? Perhaps the seminal economic event of the mid-21st century will be the replacement of most human labor by artificially intelligent robots. We may discover that in the future, human capital can become obsolete nearly as quickly as generations of processor chips do. If so, future generations may be exposed to substantial risks of prolonged unemployment and immiseration. In short, even if we succeed in raising the human capital in the average high school graduate, there may still be huge variation in the economic outcomes these enhanced graduates will be exposed to. Even SuperBabies may still may need a safety net.

The second problem involves fairness. At first glance, Holtz-Eakin’s proposal appears to raise no fairness issues. He is not proposing to eliminate an entitlement, he is just asking whether it makes better sense to give resources to you when you are young or when you are old. Except that if starting now you transferred resources from Social Security and Medicare to children’s programs, you would be transferring resources from current elderly people to current children. However, most current generations of adults did not get good prenatal care, good preschools, good schools, and so forth. They therefore did not have a fair opportunity to “make their own safety net” by accumulating the capital necessary to finance their own retirement incomes and end of life care. Many elderly are not able to finance their health care or retirement without current entitlement programs.

There is, I expect, a fair scheme for making the wealthy elderly pay for an entitlement to human capital in the next generation. It could be done through, say, a combination of means testing of Medicare and more progressive taxes. Another choice would be to support both the entitlement to human capital for youths and the entitlement to income and health care for the elderly. This would need to continue for at least the next 65 years, when the children who benefit from the human capital entitlement finally begin to retire. I am comfortable with these schemes, but I wonder whether Holtz-Eakin is.

About Bill Gardner

A health care researcher and a child and quantitative psychologist by training. I am an American living in Canada and am Professor of Paediatrics, Obstetrics & Gynaecology, and Community Health & Epidemiology at Dalhousie University; and Professor of Pediatrics, Psychology, and Psychiatry at The Ohio State University. I also blog at The Incidental Economist (theincidentaleconomist.com) and you can follow me @Bill_Gardner on Twitter.
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