why knowledge matters

Ben Bernanke is in the news for the speech he gave in Omaha yesterday. I suggest you read the speech itself rather than accounts of it. It's on the Fed's home page.

Bernanke addresses income inequality in the US; he does so concisely, dispassionately, giving due weight to ethical as well as strictly economic concerns, and acknowledging what's not known and unpredictable along with what is.

He reviews the benefits of economic growth, explains how it's dependent on increases in productivity and how, in turn, that can't be achieved without "dislocation," meaning changes in the jobs that are available in the workplace. Dislocation means people lose jobs and often find that the new jobs they're able to get pay less than the old ones did. He says the country needs to help people who find themselves in this situation, but, more importantly, he says the country needs to help people shift employment before their jobs disappear and it needs to provide the right education -- continuing education, not just childhood education -- so that people have the right knowledge and skill for the jobs that are and are becoming available. The long-term trend in the US favors workers who are well-educated and highly-skilled.

Here are his concluding paragraphs:

A better approach for policy is to allow growth-enhancing forces to work but to try to cushion the effects of any resulting dislocations. For example, policies to facilitate retraining and job search by displaced workers, if well designed, could assist the adjustment process. Policies that reduce the costs to workers of changing jobs--for example, by improving the portability of health and pension benefits between employers--would also help to maintain economic flexibility and reduce the costs that individuals and families bear as a result of economic change. Of course, devising policies that accomplish these goals in the most effective way is not straightforward, nor can such policies deal with all of the negative effects of trade and technology on affected individuals. Displaced older workers present a particularly difficult problem, as these workers have greater difficulty than others in finding new jobs and experience a greater decline in earnings than other workers if they are re-employed (Munnell and others, 2006). Considerable debate and analysis of policy alternatives lie ahead, but these discussions will be well worth the effort.

As the larger return to education and skill is likely the single greatest source of the long-term increase in inequality, policies that boost our national investment in education and training can help reduce inequality while expanding economic opportunity. A substantial body of research demonstrates that investments in education and training pay high rates of return both to individuals and to the society at large (Acemoglu and Angrist, 2001; Becker, 1964; Card, 1999; Topel, 2004). That research also suggests that workers with more education are better positioned to adapt to changing demands in the workplace.

In assessing the potential of education and training to moderate inequality, one should keep in mind that the economically relevant concept of education is much broader than the traditional course of schooling from kindergarten through high school and into college. Indeed, substantial economic benefits may result from any form of training that helps individuals acquire economically and socially useful skills, including not only K-12 education, college, and graduate work but also on-the-job training, coursework at community colleges and vocational schools, extension courses, online education, and training in financial literacy. The market incentives for individuals to invest in their own skills are strong, and the expanding array of educational offerings available today allows such investment to be as occupationally focused as desired and to take place at any point in an individual's life.

Although education and the acquisition of skills is a lifelong process, starting early in life is crucial. Recent research--some sponsored by the Federal Reserve Bank of Minneapolis in collaboration with the University of Minnesota--has documented the high returns that early childhood programs can pay in terms of subsequent educational attainment and in lower rates of social problems, such as teenage pregnancy and welfare dependency.11 The most successful early childhood programs appear to be those that cultivate both cognitive and noncognitive skills and that engage families in stimulating learning at home (Heckman, Stixrud, and Urzua, 2006).

To return to the themes I raised at the beginning, the challenge for policy is not to eliminate inequality per se but rather to spread economic opportunity as widely as possible. Policies that focus on education, job training, and skills and that facilitate job search and job mobility seem to me to be a promising means for moving toward that goal. By increasing opportunity and capability, we help individuals and families while strengthening the nation's economy as well.

Pretty straight-forward stuff; dry, but important to think about.

I notice that Bernanke doesn't dwell on the indirect economic benefits of a liberal education through college and grad school -- something in which I place my faith. One reason, in the social policy sphere, is the importance of this education to the maintenance (maybe rebuilding would be the better term) of a literate and informed electorate, capable of making governments that are themselves capable of doing as he suggests.

I recently read an article on demographic changes in the US that are likely to increase, rather than decrease, the number of well-educated voters in coming generations. I can't find it now, but the argument, as you'd expect, is somewhat elitist: immigration of illiterates and tendency of people with low educational attainments to have lots of children. I also read and have been able to find again, an article by Peter Berkowitz on Liberal Education, Then and Now which discusses John Stuart Mill's view of the subject with reference (along the way) to both Mill's Inaugural Delivered to the University of St. Andrews on February 1st 1867 and John Henry Newman's The Idea of a University. Mill said we need to keep our minds open. Berkowitz says he valued "drawing truth from rival systems of opinions." In Mill's own words, the "danger is not so much of embracing falsehood for truth, as of mistaking part of the truth for the whole."

(It's irrelvant to what I'm saying here, but worth pointing out that Berkowitz is arguing for a core curruiculum of required classes to replace what he sees as a hodge podge of electives in current higher education.)