Human capital is a very interesting economic concept and one that is not brought up in the normal course of investment strategies but this is a mistake. Human capital is the inherent ability that we as individuals have to make money. Each of us has a certain amount of human capital which we use up as we get older. By the time that we retire the majority of our human capital is used and we are then reliant almost exclusively on our investments to support us. So over time the idea is to maximize your human capital and turn as much of it into an investment pool as possible which can then be used to provide a good retirement.
Taking this at face value it can quickly be seen that an investment in your human capital is not only of utmost importance but should be continued throughout your career. To some this would mean that a university education is of utmost importance but as I have argued in a previous blog there comes a point where the cost of the education obtained exceeds the benefit to human capital. In these cases it would be more beneficial to learn through an apprentice program but the point is that education and learning are key ingredients to maximizing human capital. Looking at the world as a whole just getting everyone a high school education would lift the globe's total human capital enormously and would lift the GDPs of numerous countries significantly. It would seem like a no brainer for governments to provide this education at a minimum but power and politics can unfortunately often get in the way. Why educate the masses when they may then not vote for you once educated and you lose your cheap labor pool? As shameful as these policies are the other side of the equation is where the long hand of politics and government reaches into the university market and drives the cost of education through the roof. Worse still is the amount of interest charged to students by the government entities providing the loans. All of these policies limit human capital and therefore GDP growth.
Outside of education another way that human capital can be enhanced is through productivity growth. Looking back in time the benefits to this can be seen in the mid to late 1990s as the "miracle that is productivity growth" (Alan Greenspan) drove GDP growth through the roof. Since then there has been a slowdown in the acceleration of productivity growth This can be seen clearly in the graph below and is one of the main reasons that growth has stagnated in the United States.
Combining this productivity slowdown with the lowest labor participation rate in decades and you can clearly see why the United States and other countries around the globe are struggling with expanding their GDP. As amazing as it is then the Federal Reserve and other central bankers still believe that this problem can be repaired by throwing money at banks and lowering interest rates. Still more confounding is that economists continue to expect a recovery in the second half of the year driven by consumer spending! Until human capital growth resumes itself the globe will be stuck with slow GDP growth and the consumer will not be the driver of growth.
Hopefully the consumer is spending their money on developing new skill sets to grow their human capital rather than invest in the stock market as this will provide a far greater return on capital than the alternative and will allow the world to move out of its stagnation cycle and into a new era of economic growth.
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