Is America the World's 97-lb. Weakling?

In the relentless, global, tech-driven, cost-cutting struggle for business . . . America isn't ready—here’s what to do about it.

By Geoffrey Colvin

July 22, 2005

[Continued, page 2]

The No. 1 policy prescription, almost regardless of whom you ask, comes down to one word: education. In an economy where technology leadership determines the winners, education trumps everything. That’s a problem for America. Our fourth-graders are among the world’s best in math and science, but by ninth grade they’ve fallen way behind. As Bill Gates says, "This isn’t an accident or a flaw in the system; it is the system."

The good news is that we’ve overhauled the system before. A century ago, as America changed from an agricultural to an industrial economy, something called the high school movement swept the country. City and town leaders realized that an eighth-grade education, which was all that most people got, was no longer enough. They built and staffed high schools but rejected the European model, which prepared a small minority of young people for college, opting instead to prepare a majority of young people for life and work. This was a revolutionary concept, and many European authorities thought it foolish. But as research by Harvard’s Claudia Goldin and Lawrence F. Katz has shown, by 1940, America was far and away the world’s best-educated nation, a critical element of its post–World War II economic dominance.

We responded to a changing world again in 1958, after the USSR orbited Sputnik while our rockets kept blowing up on the launch pad. Congress passed the National Defense Education Act, which appropriated federal money for education in math, science, and foreign languages. It worked, along with America’s grass-roots response to the threat. We went to the moon, science and engineering became cool, even glamorous, and we gained a wide technology lead.

Now we need to revolutionize our schools again. As the world’s richest country, we certainly have the resources, but we seemingly lack the will, while many of our competitors are obsessed with education. In China it’s common for middle-school students to attend school from 7:30 a.m. to noon, then from 2 p.m. until 5, and again from 7 to 8:30 p.m. Contrast that with a nation where millions of parents are happy to let their kids spend hours hanging out at the mall or playing Grand Theft Auto on their Xbox or watching Pimp My Ride on MTV. To be sure, many upper-middle-class parents live in wealthy school districts with excellent schools, and they’re making private tutoring firms like Sylvan Learning Centers and Kumon into fast-growing businesses. But for most in the broad middle class or below, a top-notch K–12 education is a world away.

Evidence is mounting that the way to begin reform is for legislators to establish high standards for public schools and make the schools more accountable to parents. But even if that notion becomes a movement, it’s not clear that better education will guarantee U.S. economic dominance. If we could somehow get our high school math and science scores up to South Korean standards, which would be a gargantuan achievement, then by that measure we’d be as good as they are—but they’d still be cheaper.

A prescription urged just as widely is immigration reform. A critical element of America’s economic dominance has been its attraction for the world’s brightest, most ambitious people, but today’s immigration laws favor family reunification far above talent, intelligence, or credentials. If Albert Einstein wanted to move in today but had no U.S. relatives, he’d have to get in line behind thousands of poorly educated manual laborers who did. In a global economic competition, that policy seems crazy. John Doerr, the legendary Silicon Valley venture capitalist, recommends that every foreign student who gets a Ph.D. at a U.S. university should also get a green card (granting permanent residency) stapled to his or her diploma. But U.S. policy is moving in the opposite direction. The number of available H1-B visas, which allow highly qualified foreign workers to remain in the U.S. for up to six years, has been cut from 195,000 to just 65,000 a year, based on security concerns following 9/11.

U.S. spending on R&D will also have to increase if the country wants to remain technologically dominant. The Task Force on the Future of American Innovation, a group of academic societies, high-tech companies, and industry associations, concludes in a recent report that "the United States still leads the world in research and discovery, but our advantage is rapidly eroding, and our global competitors may soon overtake us." Aggregate R&D spending by six fast-growing economies (China, Ireland, Israel, Singapore, South Korea, Taiwan) is on track to exceed U.S. spending in a few years. Industrial R&D continues to increase, but 71% of that spending is on development, not the kind of basic research that created the transistor and the laser. Federal funding of research in the physical sciences has been declining as a percentage of GDP for 30 years. The Council on Competitiveness, consisting of CEOs, university presidents, and labor leaders, wants federal research spending increased substantially, to 1% of GDP—about $110 billion a year.

Incredible as it seems, America’s infotech infrastructure is no longer world-class. We rank only 12th globally in the number of broadband connections per 100 inhabitants. Look closer and the situation is even worse. South Korea is not only more wired (No. 1 globally) but its connections are far faster than ours and are available not just through wires but also through virtually every cellphone. And speaking of our cellphone infrastructure—please don’t. Anyone who travels globally knows it’s awful by world standards.

Fixing all these problems would be a project of overwhelming proportions, yet it still might not make American workers competitive in today’s global labor market. The reason, again, is cost. American workers are enormously more expensive than their peers almost anywhere but in Western Europe. So they must confront what may be the most important question of their working lives: How can they be worth what they cost?

As increasing numbers of them find that they can’t be, at least in the short run, the result could be political upheaval. A return to protectionism is looming. When the end of global textile quotas earlier this year caused the rapid loss of 17,000 U.S. jobs—a tiny number in a nation of 141 million workers—the administration found a loophole in the trade treaty and quickly reimposed restrictions. Senator Charles Schumer (D-New York) introduced a bill to impose a 27.5% tariff on Chinese imports, and five Republican Senators signed on as co-sponsors. The Central America Free Trade Agreement, the impact of which would be minuscule in the U.S., is struggling to pass Congress. (No one in Washington seems to think NAFTA would stand a chance of approval today.)

If it all sounds terribly gloomy, it’s important to remember that gloominess has a very poor record in predicting the U.S. economy. Many traits that have helped us meet previous challenges are still with us: flexible labor markets, the world’s most highly developed capital markets, and a culture that moves on from failure and embraces new ideas. Companies aren’t standing still. Trilogy, a business software company in Austin, realized almost three years ago that hiring programmers in the U.S. no longer made sense because it could get them in India for one-fifth the cost. So it offered to help its U.S. coders learn higher-level work, becoming business experts who could help Trilogy customers make more money—for example, by showing Goodyear how to price tires more intelligently. As a general principle, learning higher-level work is what American workers have to do.

And exactly what work would that be? No one is sure, though history says not to panic. Economic crises rarely reveal their solutions, but the solutions usually come along. When U.S. business went through the trauma of restructuring in the 1980s, millions of middle managers got cashiered and wondered what they’d do next. Undreamed-of new industries developed (cellphones, biotech, Internet services), and by the mid-’90s the unemployment rate was the lowest in decades.

That’s history. It offers hope but no assurances. History says the rise of China, India, and other developing economies could someday lead to a new equilibrium that’s better for everyone. With resources deployed globally to their best use, prices could come down and living standards could eventually increase everywhere. After all, America’s rise didn’t impoverish Europe. On the contrary, the success of each continent helped the other get richer.

What happens next in the U.S. depends on how workers respond. Trilogy CEO Joe Liemandt recalls what happened when he told programmers he wouldn’t need them as programmers anymore: "We told them they could react in one of three ways. They could get really pissed, they could be in denial, or they could work with us to retool their skills. And we had people in each group."

It’s time for a massive, urgent American response to the global challenge. As Cisco chief John Chambers says flatly, "We are not competitive." Where to start? Venture capitalist John Doerr, one of America’s most passionate competitiveness campaigners, calls education "the largest and most screwed-up part of the American economy." He’d start there. GE chief Jeff Immelt has attacked America’s newly restrictive student visa rules. Others focus first on R&D spending or the broadband infrastructure. But the greatest challenge will be changing a culture that neither values education nor sacrifices the present for the future as much as it used to—or as much as our competitors do. And you’d better believe that American business has a role to play—after years of dot-com-bust- and scandal-driven reticence, more corporate leaders need to summon the courage to lead.

While optimism has always been the best guide to predicting the U.S. economy, today’s situation is unprecedented. Global product markets have been with us forever and continue to expand. Global capital markets are still developing—watch out, Unocal and Maytag. But global labor markets on a broad scale are a new phenomenon that could, for better or worse, transform the country. How we respond—in our businesses, our government, and our culture—will shape America in the deepest way.

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