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Education and Economic Development:
Beginning a Dialogue
Sandra Pianalto
President and Chief Executive Officer
Federal Reserve Bank of Cleveland
Conference on Education and Economic Development
Federal Reserve Bank of Cleveland
Cleveland, Ohio
November 19, 2004
Good morning, everyone. On behalf of the Federal Reserve
Bank of Cleveland, I would like to welcome you to Day 2
of our conference on education and economic development.
I have been looking forward to this event for some months
now. It is a strategic objective of this Bank is to engage
in research on issues that are important to our region.
In my travels throughout the Fourth Federal Reserve District,
and really throughout the country, education stands out
as one of the most critical issues. I know that we will
all benefit greatly from the presentations we hear and
the discussions we share today.
If you were with us yesterday, you heard some of the
latest research findings on education and economic
development.
Today’s presentations will center on the policy-related
issues. I think that both elements—research and policy—are
essential to better understand how we can obtain the greatest
possible returns to public funds devoted to education.
In my remarks this morning, I will first focus on why
the Federal Reserve is interested in this topic.
Then I will
make a few comments related to the quality of education,
and I will conclude by exploring the links between research
and public policy. I have to warn you however, that I
am going to be spending most of my time raising questions
rather than giving answers or proposing solutions.
I. The Federal Reserve’s Policy Role
Let me begin with the question of why the Federal Reserve
is interested in education and economic development. Most
people know that our organization is responsible for setting
monetary policy. Under the Federal Reserve Act, Congress
has charged the Federal Reserve with promoting the goals
of maximum employment, stable prices, and moderate long-term
interest rates.
Of course, these goals do not specifically
require us to do things like hold conferences on education.
But to set
an appropriate monetary policy, we must understand the dynamics
of the real economy, and this means that we need to understand
the policies that enhance or inhibit growth. Clearly, capital
accumulation is a prerequisite for sustained economic growth.
And when I say “capital accumulation,” I am referring
to this term in its broadest sense. This includes both physical
and human capital.
To bring this issue closer to home, let me tell you
why I have an interest in this topic. Most of you
know that the
Federal Open Market Committee, or FOMC, is the Federal Reserve’s
policymaking body. As president and CEO of the Federal Reserve
Bank of Cleveland, I participate fully in the policy discussion,
and this year I have had a vote on policy direction. Part
of my role is to bring information about my District’s
economy to the FOMC meetings. To inform that local perspective,
I rely on economic data from my Research staff as well as
anecdotal reports from people in my District.
I spend a lot of time traveling throughout the Fourth
District and meeting with business leaders to get
their input on current
economic conditions. More
often than not, those discussions turn to questions about employment. People
in our region are wondering why job opportunities have still not picked up
all that much during the current economic expansion compared with this stage
in previous expansions.
We suspect that some longer-term factors have been
affecting the regional employment situation. Growing
economies tend to change shape over time, and that
eventually
leads to economic transformation. By that I mean that some sectors grow faster
than others, and some sectors might actually decline.
For example, at the turn of the 20th century, agriculture
accounted for the majority of employment in our country,
but today it accounts for only about
1 percent. Similarly, we have also been witnessing a decline in manufacturing’s
share of employment over the past 50 years or so.
Our region is certainly aware of the growing pains
that accompany an economy in transition. Ohio remains
far more concentrated in manufacturing employment
than the nation—16 percent compared with 11 percent—so the manufacturing
job picture affects our labor market more heavily.
Ohio’s manufacturing tradition once gave many people a path to higher
earnings without the need for higher education. We all know that day is over.
Like most other states and most other countries,
we are seeing that manufacturing jobs are steadily
giving way to jobs that may require different skills
or educational
requirements. And, in fact, the educational requirements of service sector
jobs are changing as well.
I am convinced that education holds the key to our
continued success as a region. My friend Luis Proenza,
who is president of the University of Akron, has
stated
that lifelong learning has literally become the new infrastructure of our knowledge-based
economy. Education, as infrastructure, means that we must be willing to see
our schools, colleges and universities as key players in economic development—because
of the talent they create, the research they conduct, and the new knowledge
they produce. It is partly from research and innovation that new companies
are born and new jobs are created. Indeed, research and innovation help to
drive economic expansion and the creation of new wealth.
In our Bank’s 2003 Annual Report, we propose that innovation is the true
engine of economic prosperity. Research and innovation can also play a vital
role in advancing the performance of our educational infrastructure.
II. The Question of Educational Quality
So let me now turn to the topic of educational quality. I
think this is a dimension that is often overlooked. To
take one simple example, if we look at data from developed
countries, there does not appear to be much of a relationship
between levels of education and levels of gross domestic
product, or GDP. But on closer examination, it turns out
that it is not just the level of education, but the quality of the education that matters. And, once quality is included,
we do find a significantly positive relationship between
education and GDP. As a result, public policies that are
designed to produce “more education” without
regard to the quality of the product might lead to more
years of education, but little lasting benefit.
A recent report from ACT, an organization that administers
the college-entrance examination, states that the core curricula
in American high schools are insufficient in preparing students
for college-level work and even for job training. The report
concludes that only 22 percent of the 1.2 million high-school
students who took the ACT test in the 2003-to-2004 academic
year were adequately prepared for college-level courses in
English, mathematics, and science.
This situation has several important implications.
First, it should give us pause to think that merely
by raising high
school and college graduation rates, the new graduates will
have significantly improved their human capital. Second,
we should question whether the additional public funding
needed to achieve those higher completion rates would be
money well spent if quality is lacking. Third, we must recognize
that inadequate preparation places burdens on colleges, which
will need to provide remedial education to entering students.
We must keep in mind that these problems are not someone
else’s problems—they are our problems. The problems
I have been describing are common throughout the country.
Solutions are not obvious, and resources are scarce. A further
complication is that different constituents often have firmly
entrenched views on how to address these issues, whether
or not their opinions are supported by the facts.
III. A Look at the Link Between Research and Public Policy
That brings me to the final area I want to comment on this
morning, and that is the connection between research and
public policy. As we will see in our discussions today,
it is useful to think of producing education in the same
way we think about producing any other good. Take some
inputs, put them together in a certain way, and produce
some output. Well, that’s a good starting point!
But immediately we face several critical questions,
which we do not know how to answer with any comfortable
degree
of certainty:
- First, what are the inputs to education and how do
we measure them?
- Second, what is the output and how is it measured?
- Third, how should the inputs be combined?
- And finally, what roles do governments play in ensuring that
the best combinations take place?
If we go back to the basics and seek answers to these
fundamental questions, I think we will go a long
way toward better understanding
how we actually produce human capital today, and how we might
obtain even better outcomes in the future.
Believe me; I appreciate the role that economists play
in sweating out the details of measurement issues
and education
production functions. But when all is said and done, those
of you in the public policy arena are responsible for allocating
scarce public resources to achieve the highest return from
the dollars invested.
Because governments control so much of the educational
machinery, important resource allocation decisions
are made in the political
arena, not the marketplace. In recent years, frustration
with government solutions has resulted in educational experiments
designed to simulate some aspects of market systems, such
as vouchers and charter schools. I think it is fair to say
that there are few aspects of educational policy and financing
that are free from controversy today.
I know that many people in this region are uncertain
about the condition of our educational infrastructure.
People wonder,
for example, whether we are paying enough attention to the
potential benefits of expanding early childhood education,
whether we are spending the right amount of money on primary
and secondary education, whether state funding of education
at all levels is too low, and whether the outflow of college
graduates is too large. These are legitimate concerns that
deserve further study.
We can begin with the education of very young children.
I suspect that many of us regard early childhood
education
as a sound investment, yet most of the public infrastructure
and policy discussions are centered on the later years of
a child’s education. As a rule, most early education
is the responsibility of the families involved, and can take
a number of different structures, both formal and informal.
Are public policy makers missing something important by not
paying more attention to preschool education? There is a
large body of research on this topic, and we will hear a
summary of that work this morning.
Moving to the middle of the educational spectrum—primary
and secondary education—we hear some differing opinions.
Some say we are not spending enough, and others say that
money alone is not the answer to improving educational outcomes.
Those who call for more money discuss using those funds to
reduce class sizes, to pay teachers higher salaries, to purchase
more equipment and supplies, and to improve the physical
condition of schools. Those who downplay the benefits of
additional funding think that we can improve educational
outcomes by making more effective use of the dollars we already
have available.
How much latitude do local school boards and superintendents
have to effect change within their school districts? What
have we learned that could help us evaluate these subjects?
These topics will be discussed later this afternoon.
Finally, what about higher education? It is not uncommon
to hear college and university presidents justify requests
for increased public funding with the logic that college-educated
people earn more than those who have not completed college.
Presumably, the taxes that these newly educated people will
pay on their higher earnings over time will more than pay
for the increased public subsidies. This might be true in
some instances, but how can we determine when, and to what
degree?
There are several other questions to consider. If individuals
have such great earnings potential, why don’t we expect
more students to finance their own educations? Are the public
benefits to higher education so large that they merit public
subsidies? If public assistance is warranted, how might we
know whether public institutions should reduce tuition, or
whether loan assistance or tuition tax credits make more
sense? I don’t expect that we will be able to answer
all of these questions today, but by asking them, I hope
to make the point that different approaches might have different
consequences — and each of them merits our attention
and analysis.
Education finance policy can have consequences for
all citizens through its potential effects throughout
the tax system.
States typically rely on sales taxes, property taxes, and
income taxes to finance their schools. But we know that states
differ greatly in how they use these taxes, and how much
of the financing is at the state and local
levels. Many states are in turmoil over how to design their
financing systems.
We know that the way education is financed has consequences
for those who bear the financing burden. As a general rule,
people will take actions to avoid the burden, often by moving
away. Public policy makers need to anticipate these consequences
and be prepared to accept them.
Conclusion
We know that it will take time and money to achieve
better outcomes. But progress will also require a willingness
to
think in new ways about educational goals and the trade-offs
involved in attaining them. To create lasting change, many
stakeholders will need to participate in the discussions,
which is why I am pleased to see such a diverse group here
today.
My hope is that by sponsoring this conference, we can
call attention to what economists have learned from
studying the
design and performance of education
systems. The Federal Reserve Bank of Cleveland views this as an important public
policy issue, one in which we will remain active in helping to search for better
outcomes.
Thank you for participating in our conference and for
your commitment to the goals of education and economic
development. Together, we can begin to ask
the important questions about education and public policy, and then use what
we learn to help build educational systems we can all be proud of—systems
that will help our region, and our country, prosper.
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