The Impending Human Capital Crisis: States Start To Slash Education Funding

One of the major effects of the financial meltdown is budget crises hitting numerous states. Across the country, states are going to face $97 billion in budget shortfalls over the next two years, which could rise to $140 billion by mid-2010 if no action is taken.

The root of this shortfall — like most of the financial crisis — can be traced back to the implosion of the housing market. Depressed home values have led to reduced property taxes, at the same time that personal cutbacks have led to decreased collection of sales taxes, and thus states are left in a revenue hole that they did not see coming.

40 percent of local school budgets come from property taxes, and in order to balance their budgets (as many states are constitutionally mandated to do), states have taken to slashing education funding. Gov. Jon Huntsman Jr. (R-UT) has proposed a $59 million cut in state education funding, while in Washington, higher education institutions were “warned to prepare for 20 percent cuts.”

Allowing this trend to continue would be a mistake. America is already losing its competitive academic edge, and can ill-afford to fall further. As former Secretary of Labor Robert Reich wrote, the disappearance of education funding is “absurd”:

Schools are being closed, teachers laid off, after-school programs cut, so-called ‘noncritical’ subjects like history eliminated, and tuitions hiked at state colleges…We’re bailing out every major bank to get financial capital flowing again. But we’re squeezing the main sources of our nation’s human capital. Yet America’s future competitiveness and the standard of living of our people depend largely our peoples’ skills, and our capacities to communicate and solve problems and innovate — not on our ability to borrow money.

Reich adds that “without adequate funding we can’t attract talented people into teaching, or keep class sizes small enough to give kids a real chance to learn, or provide them with a well-rounded curriculum, and ensure that every qualified young person can go to college.”


At Forbes, Thomas Cooley explained that investments in human capital are made with an “eye toward producing benefits in the long term”:

This assertion generated a lot of pushback from people who feel passionately that any stimulus package should focus on creating jobs right now. Clearly that’s important, but it is also not a long-term fix, particularly when the jobs to be created are not likely to be the high-quality, long-term career positions that make for a successful economy. From this perspective, investing in human capital is the way to go.

Indeed, The Wonk Room has previously noted the “significant positive returns” that would result from investments in human capital: better educated people are more productive, less likely to require public assistance, and make more money, thus paying more taxes that can be spent on providing education to the next generation.