The Depreciation of U.S. Human Capital

While federal legislators have often promoted investment in equipment and other business capital, evidence indicates they have increasingly reduced the portion of national income allocated to the larger, more significant stock of the nation’s capital: the knowledge and skills of the people, often called “human capital.” In all types of capital accounts—financial, real, or human—net investment equals gross investment in new capital minus what is known as depreciation, or the decline in value of existing capital due to obsolescence and other factors. The federal government has especially been encouraging faster depreciation and obsolescence of U.S. human capital for some time, only intensifying this effort in the last year.

Unlike financial and real capital, there are no markets to assess the overall value of human capital. However, as I explain here, the market income of individuals, represented by wages, along with dividends, interest, and other forms of capital income, provides at least a way to gauge the market return from all types of capital, including human. Data on the limited growth in market incomes over recent decades, except near the top of the income distribution, suggest that there are limited gains in human capital for much of the population.

I recognize this discussion is somewhat abstract. I want people to see how rising market income inequality, excluding government transfers, reflects not only the gains of the wealthy but also limited improvements in ownership of financial, physical, and human capital for most others.

Below, I provide more concrete evidence of how the government has been undervaluing the U.S. stock of human capital: declining investment in education and children; treating larger portions of the population like “one-hoss shays,” which suddenly depreciate rapidly and fall apart when they reach their early-to-mid 60s; and more recently, undermining business competitiveness through tariffs, defunding research, and restricting the number of highly skilled and creative immigrants entering the country.

The Evidence

Education and Children

Since 2007, my colleagues at the Urban Institute and the Tax Policy Center have been tracking spending on children in a Kids’ Share publication. Over recent decades, this spending has remained relatively modest at the federal level and has decreased significantly as a share of domestic spending. About 400,000 classrooms lack a certified or qualified teacher. And, one of my pet peeves, this wealthy nation still refuses to provide more universal access to early childhood education with well-paid teachers.

Meanwhile, as student loans in higher education have replaced other forms of direct support, they have contributed to reducing both college participation and young people’s net worth by significantly increasing their financial debt without providing educational gains.

Regardless of the level of inputs, data from the National Assessment of Educational Progress show that high school seniors’ math and reading scores have dropped to their lowest levels in over 20 years. Absenteeism remains consistently high. Meanwhile, college attendance rates have declined significantly, especially among men, as new students face high costs and limited financial aid. Our overall educational achievement today is far below that of other countries.

Treating people like one-hoss shays that suddenly fall apart.

Most investments, such as in housing, plants, or equipment, are assumed to depreciate or lose value over time as they age and need more repairs. Retirement policies, however, define older people as almost instantly becoming unproductive even as, over time, they have become healthier. Like “one-hoss shays,” they are believed to work well until one day they suddenly fall apart and should simply be discarded as useless, at least within formal markets. Social Security, for example, tells us we are all officially “old” at age 62, but not a day before. When the program started, lives were shorter, and work was more physical; it defined people as “old” (eligible for Old-Age Assistance) at age 65.

As a result of this attitude, our government retirement systems, supported by many private and public employee retirement plans, have encouraged individuals to retire completely rather than gradually from the workforce, partly through rules that penalize later retirement and obscure phased-retirement options. Anyone over age 65 who remains employed with an employer that offers health insurance loses thousands, possibly up to $10,000 per person, in Medicare subsidies. Meanwhile, through a mechanism known as an “earnings test,” Social Security begins reducing benefits when earnings exceed a modest amount. Although higher benefits later compensate for this reduction, many people see the benefit cut as a form of tax. Additionally, the Social Security Administration makes it quite complicated and non-transparent for individuals to take partial retirement.

Despite this, because of longer lifespans and earlier retirements, people now retire about 13 more years than they did in 1940, when Social Security first began providing benefits. A typical couple will have at least one person living to around age 90, roughly three decades after benefits become available at age 62. While many have found ways to stay productive outside the workplace, many have not. But there’s no end in sight. Medical advances continue to extend the length of retirement, especially for those with higher lifetime earnings.

Reducing competitiveness

Efforts to protect U.S. industry through tariffs often create a dependency that makes protected businesses less competitive. Moreover, one industry’s gain is often another’s loss, since many domestic production lines rely on tariffed inputs from abroad. The latest reports on China indicate that it is increasingly surpassing us in producing better and cheaper products.

This isn’t an argument against policies that make strategic investments, consider defense needs, subsidize research, and react to anti-competitive practices abroad. It is about the government arbitrarily choosing winners and losers based on whim and the efforts of lobbyists, campaign contributors, and members of Congress seeking a share of the subsidy pie for their constituents.

Meanwhile, in Science, Monica Hersher and Jeffrey Mervis explain that the federal government has lost 10,000 STEM Ph. D.s in less than a year since President Trump took office. During the same period, the number of international students attending U.S. colleges has dropped by 17 percent. (Thanks to Catherine Rampell for finding and sharing these statistics.) Even harder to measure are the long-run negative effects of the attack on research grants. Secretary of Health and Human Services Robert F. Kennedy’s hesitation to review evidence on certain vaccines is just one of the latest examples of the broader attack on knowledge itself.

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Given these findings, it is hard to avoid the conclusion that we have increasingly relied on the investments and sacrifices of our ancestors rather than on our own efforts. Declines in K-12 educational achievement, lower participation in higher education, the retirement of larger portions of the adult population on average for nearly one-third of their lives, and policies that weaken industry through tariffs and federal actions targeting science and knowledge creation all reflect a nation that increasingly “depreciates its human capital” and no longer prioritizes the well-being of future generations.