The State of the Union's Human Capital

NEW YORK (TheStreet) -- When the President talks about "income inequality" during his State of the Union speech on Tuesday, investors will flash back to childhood, to the sound of fingers being scraped on a blackboard, the sound of a cockroach being squashed underfoot or maybe the taste of broccoli being forced down by a loving parent at dinner.

What they will hear will be a call to take their money and give it to someone else. The economic pie is only so large. Giving others' a bigger piece means less pie for me.

It's a natural feeling, but it's not always right.

Over a century ago, when America's infrastructure was being built, capitalists felt the same way about regulation. The idea of government telling them how they could charge for use of their property sounded like socialism, and they resisted it.

But before that infrastructure could be deployed for mass manufacturing, creating the auto industry, the appliance industry, and so many others, the rates for industrial inputs -- rail rates, kerosene rates, electricity rates, communication rates -- had to be straightforward and fair.

As Ron Chernow wrote in his biography of John D. Rockefeller, Titan, Ohio Republicans enforced this principle, sending Rockefeller fleeing their writs out of Cleveland and into New York.

As Doris Kearns Goodwin wrote in her book on the succeeding era, The Bully Pulpit, President Theodore Roosevelt, pushed the same principle on the federal level, even getting the support of J.P. Morgan to end a coal miners' strike on terms favorable to the miners.

What the Ohio Republicans started, what the Roosevelt Administration finished, and what men like Morgan eventually accepted, was the idea that rates would be regulated, and regularized, in exchange for having some group given monopoly control over the resource.

Without uniform, dependable rates, the pie baked by the trusts wouldn't grow.

Government power had become necessary for economic growth. Electric and telephone utilities agreed to allow government regulation in exchange for monopoly power, to maximize what was then scarce financial capital and make the U.S. into one market.

Today, every country can acquire this infrastructure, this physical capital. There's an abundance of money, and energy, which has created great infrastructure around the world. Our competitors are catching up, and our capitalists are seizing these opportunities, to America's detriment.

But there is another capital account left to be exploited, and the nation that maximizes this store of capital will lead the 21st century and attract that money to our economy.

That capital is human capital. The capacity of people to learn, to grow, to act, along with their willingness to do so, and the economy's ability to absorb them, is the key to growth in our time.

The Internet is the railroad of our era, and spreading that abundance is important. But human capital can be either positive or negative, depending on what happens to the person in question.

If you don't learn, if you turn to crime, your human capital value is negative. If you don't have the chance to learn because you grow up hungry, or your parents don't raise you right because they're ignorant, or your schools are horrible, or you don't have access to this abundant technology, your human capital value will be negative. The rest of us will have to make up for your failure.

The issue of income inequality isn't about making everyone's income equal. It's about maximizing human capital. Most people are satisfied with a home, educated children, work that matters and security in old age. Most people are happy if their human capital value is maximized.

With Moore's Law economics, capital is no longer the gating factor in maximizing human capital. It's the deployment of capital that's the gating factor. The nation that deploys its capital best, so that every citizen has the knowledge he or she needs, and the freedom to use that knowledge, will win the 21st century. The nation that best takes advantage of Moore's Law and invests its abundance in its people, is the country that will lead the world for the next generation.

Will that nation be ours? It can be. We already have the key ingredients with which to maximize that capital -- personal liberty and democracy. And that democratic system must now decide where that abundant capital will be deployed, in America's human capital or in the world's physical infrastructure. The answer should be both.

When the President talks about "income inequality," he's talking about this choice, about where America's abundance will be deployed to best advantage. He's talking, not about taking pie from you and giving it to someone else, but about how to make a bigger pie.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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