The Agenda

What are the Payoffs to Investing in Human Capital?

In his latest Economix post, Ed Glaeser argues that Detroit needs to invest in home-grown talent rather than infrastructure, of which it already has more than enough:


Over the last 40 years, sun, skills and small companies have been strong predictors of urban growth, but Detroit is a cold city of big companies. About 12 percent of its adults have a college degree. A city built to house almost two million people now has 911,000. While Detroit was one of the richest places on the planet in 1950, it is now synonymous with urban poverty.

Detroit’s problems were compounded because the city in distress invested in structures, rather than people. Federal support has been almost entirely focused on physical capital, like housing and transportation infrastructure.

This is clearly right, and Detroit’s municipal government is taking drastic steps to right-size itself, hopefully a first step towards a healthier, more sustainable model of delivering public services.

But there is a serious barrier to investing in people rather than things, namely that people can move. As Glaeser has written elsewhere, investing in home-grown talent in Detroit, New Orleans, Appalachia, and other depressed regions often means investing in the future of more prosperous cities and regions that absorb economic migrants. And of course Detroit natives tend not to send remittances to the Detroit public schools. One assumes that there is some degree of brain circulation that benefits Detroit and southeastern Michigan when bright natives go on to success elsewhere. But politicians (a la the Curley Effect) often have narrow interests and narrow time horizons.

Consider the options facing a public official in Detroit. New construction projects create jobs fairly quickly, in many cases jobs that offer above-market compensation to people who will contribute to your campaign coffers and admire you for years to come. They also, ahem, create opportunities for graft and kickbacks. But educating children really well? This is a minefield. Doing so might require varying compensation in such a way that good teachers are paid better than bad teachers, both of whom are entitled to the same number of votes. It might mean shifting resources from Detroit-based personnel to low-cost online instruction that sends dollars from your constituents to professionals based in Oklahoma City or Manila. Why bother?

It’s clear that individuals have an interest in investing in their own human capital, and parents have a somewhat more attenuated but still palpable interest in investing in the human capital of their children. It gets more complicated when we turn to local governments. Affluent parents who are in a position to make Tiebout choices will often act like savvy consumers, and educators in affluent school districts are often keenly aware of this fact. Less affluent parents tend to have less power in this transaction, and they tend to exercise less oversight. The public takes on a larger role in making a human capital investment. Yet the incentives to spend money effectively in this case are, as we’ve seen, pretty darn weak.

In The Unincorporated Man, a quirky science fiction novel, schools acquire “shares” in incorporated individuals, and reap the benefits of the success of alums. The more prestigious and effective the school, the larger a slice of equity it demands. This is obviously not practicable in our world, at least not yet. I wonder, rather fancifully, if the idea of creating a human capital divided is a useful way to think about future reform efforts. In Britain, for example, many have called for tuition repayment to be tied to future wages, which of course creates implicit marginal tax rates that might discourage work effort. We have to find some way to account for psychic income if this system is to work. Then there is the small matter of enforcing these contracts …    


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