ahhh, can we please get a political leader with such clarity of thought?
Toward a New American Century
Immigration reform, investments in human capital, and a saner housing policy can help restore U.S. economic leadership.
By Michael Milken
Has the American Century come and gone? I don’t believe so. Despite high unemployment, declining education standards and greater competition from China and other countries, we can extend America’s pre-eminence long into the future if the public and private sectors—and all of us as individuals—assume greater responsibility for our common destiny.
Six areas in particular provide opportunities for positive change:
• Housing. My early academic research showed that investments in loans against real estate were worse investments than loans to businesses. Collateralized loans to U.S. companies, which create nearly all American jobs, have stood the test of time. Meanwhile, investors have suffered some $1 trillion in losses on supposedly safe mortgage-backed assets. Consider how many more jobs small businesses would have created if they’d enjoyed the same terms we gave homeowners—easy access to 30-year, government-guaranteed loans at near-prime rates with no prepayment penalties. Those terms encouraged larger houses—the average size doubled in a generation to 2,500 square feet, even as family size shrank. This required more land farther from cities, and we bought bigger cars for longer, energy-wasting commutes.
It was a great misallocation of resources spurred by government policy and individual choices. We justified it on the theory that home ownership is a social good that builds personal responsibility and contributes to stable communities. But our ill-conceived policies produced the opposite—excessive consumer debt, irresponsible lending, mortgage defaults, unemployment and declining neighborhoods.
Ironically, a larger share of the population own homes in many other countries where borrowers don’t have a mortgage-interest tax deduction and put up far more equity (and where lenders have recourse against their non-housing assets). American policy makers got it backwards: In the long run, jobs support housing, not the other way around. Among other reforms, we could start a gradual phaseout of non-recourse residential mortgages.
• Entitlements. Unrealistic promises of overly generous health and retirement benefits forced General Motors, once the world’s largest company, into bankruptcy. Unfortunately the simple math of GM’s situation applies to many institutions, including state and local governments that face massive pension commitments.
Looming even larger are the federal government’s long-term obligations to recipients of Social Security and other entitlements. The problem is rooted in (a) unrealistic assumptions about rates of return on assets; (b) falling ratios of current workers to retirees; (c) workers who pay in to the system for too few years; and (d) pensioners who live longer than the original planners assumed. It’s a complex problem whose solution will almost surely involve a political compromise between higher wage taxes and lower real benefits. But an important first step would be to periodically adjust minimum retirement age to 85% of average life expectancy.
• Education. In 1982, the Milken Family Foundation began to study which factors had the greatest impact on student achievement. What we found was that teacher quality is far and away the most important school-related factor. In response, we launched an educator awards program to seek out, recognize and reward exceptional teachers.
In 1999, as more nations moved ahead of America in student performance, our foundation launched TAP (The System for Student and Teacher Advancement) to attract, develop, retain and motivate the best teaching talent.
TAP, now run by the National Institute for Excellence in Teaching, a public charity, works with school districts in a growing number of states to hire and keep the highest-quality teachers possible. It does this through powerful, embedded professional development, transparent and fair teacher evaluation, and performance-based pay. Widespread adoption of such programs would provide a major long-term stimulus to the U.S. economy, and help regain the educational leadership we once enjoyed among nations.
• Health. Out of every $10 our nation collects in taxes, the government invests only a few pennies on medical research aimed at reducing suffering and death from heart disease, cancer and other dreaded conditions. Faster medical advances would lessen pain and grief while yielding enormous productivity benefits. More publicly supported research will help, and we should demand it.
But we should also demand more of ourselves. The Milken Institute’s 2007 study, “An Unhealthy America,” notes that 70% of health costs (more than $2 trillion a year) are related to lifestyle. So prevention is at least as important as finding cures through research. Government programs are no substitute for personal responsibility in reducing the costs that flow from smoking, poor diets and inadequate exercise.
• Immigration. While the public debate centers on undocumented, low-skill workers, we should be equally focused on high-skill professionals in whose faces we’ve too often slammed the door. From Alexander Graham Bell and Albert Einstein to Jerry Yang, Sergei Brin and thousands of others, immigrants have historically boosted our economy. One example: More than half of Silicon Valley’s science and engineering workforce is foreign-born.
Canada, the United Kingdom and Australia encourage immigrant investors. China, Russia and Israel, among other countries, appeal to their highly trained technical diasporas to “come home.” Singapore entices leading researchers and technologists to its $2 billion Biopolis biomedical center. The real immigration issue is not only huddled masses yearning to be free—it’s smart entrepreneurs and scientists who can change the world. Any nation that fails to welcome them will fall behind.
I have long proposed expanded visa programs for skilled workers and for substantial investors who purchase property or create jobs. (These workers and investors are also consumers, so let’s not discourage them by taxing their foreign income.) And we should grant permanent residence to graduates from accredited science and engineering programs.
• Energy. When Richard Nixon was in the White House, the United States imported about 36% of its oil—a dependence he vowed to eliminate. A few years later, citing “the moral equivalent of war,” President Jimmy Carter said “this nation will never use more foreign oil than we did in 1977—never!” Yet in the Carter administration, we imported 40.5% of our oil. President Obama pledged last year “to reverse our dependence” on imported energy sources, echoing similar words from each of the last eight presidents. We now import well over 60% of our oil.
For the future, let’s recognize that energy security is at least as important as cotton and tobacco, whose prices we support. Oil needs similar support to avoid a repetition of the 1980s, when many financial institutions and investors who responded to the call for energy independence were devastated by plunging prices. Lack of that support will discourage new investments in sustainable energy sources.
Regrettably, the political hurdle is high because people want lower prices at the gas pump. They forget that we also pay for energy security with aircraft carriers, antiterrorism measures, environmental degradation and, most tragically, military and civilian lives.
These are not new issues. In most cases we can address them without more taxes and government spending. What we do need from both parties in Washington and our statehouses is leadership. That includes a determination to tell the often-uncomfortable truth. Stop telling Americans they can have it all and start doing a better job of allocating the resources we have.
Our competitors are directing increasing resources to human-capital development and energy security. We have the capacity to match them. But do we have the will?
Mr. Milken is chairman of the Milken Institute in Santa Monica, Calif. The above is adapted from the forthcoming book “Where’s Sputnik?” to be published in 2011.