Summary

The US is largely seen as the innovation center of the world, at least when it comes to consumer, military, pharmaceutical and business products successfully brought to market.  To this end, roughly 66% of the US GDP is STEM (Science, Technology, Engineering and Math) related producing roughly $2.3 Trillion in tax base for the federal government.  Unfortunately, this GDP and tax base sits on an unstable base as roughly 40 to 50% of US engineers come from other countries (often through visa programs tailored to meeting US engineering needs).  These numbers combine to create a significant national security issue, one with significant economic and defense related impact in times of global crisis (warfare, pandemics, etc).

  • STEM is responsible for nearly 66% of US Jobs and 70% of US GDP and represents $2.3 trillion in US tax revenue (American Society of Mechanical Engineers)
  • The US employs 5.1 million foreign born (immigrants and visa holders) engineers and 6.1 million US born engineers. (American Immigration Council and National Science Board)
  • US institutions graduate roughly 120K US citizen engineering graduates per year, up from 47K per year in the late 40s (American Society of Engineering Education)
  • The US sees roughly 330K applications for STEM related (largely engineering) H1B Visas per year.

As a nation, we can and must do something to further protect our supply chain of innovation.  Every avenue should be pursued, including but not limited to:

  • Re-imagining how we teach STEM in secondary schools such that more kids become interested in pursuing STEM (and especially engineering) as a career.
  • Re-imagining how we teach STEM in universities to help students see the value of it earlier in their academic careers.
  • Educating our children on the value of a STEM education.  While college tuition remains roughly constant (outside of lab fees and textbooks) for all degrees, degrees do not have similar returns and STEM degrees tend to significantly out-perform most other degrees.
  • Changing how we allocate capital for college education.  Consider making certain STEM degrees fully funded without debt, with the expectation that such degrees have a higher return on the tax base than the cost of education.

How an Economic Theory Flattened the Earth, Creating both Prosperity and a National Security Crisis

The last two years have taught us a lot.  The Russian invasion of Ukraine and the global COVID pandemic have taken their toll on our supply chains, the accessibility of many goods, and the prices we pay for the goods we can find.  The semiconductor industry serving everything from automobile manufacturers to luxury entertainment goods has been especially hard hit with inventory problems and delays, largely from COVID related impacts.  Ford, for instance, has been parking mostly completed Ford Broncos in a lot near their Michigan plant as they await chips [https://jalopnik.com/thousands-of-ford-broncos-sitting-in-michigan-parking-l-1848576211], and both Microsoft and Sony have struggled to meet the demand for their new Xbox and Playstation 5 consoles .

The economic theory of Comparative Advantage is largely to blame for our current predicament.  Put simply, Comparative Advantage indicates that if a product (e.g. semiconductors) can be produced in Country A more cheaply or easily than in Country B, then it’s in both countries’ best interest to allow Country A to produce the product.  Country B can then focus on other products in which it can reign supreme.  When writ large, the entire world benefits through better products and lower prices.  It’s an excellent theory that works until petty imperialism and pesky viruses slam their collective fists into your board game and scatter your pieces. 

Chip shortages alone are apparently responsible for cutting US economic growth by 2 percentage points in Q3 of 2021. This impact has businesses within the hardest hit sectors are re-evaluating their supply lines.  Ford for instance is clearly rethinking its approach to comparative advantage and is inking deals for its chips to be made within the United States while also considering vertical consolidation to build its own chips.  Politicians are also interested, noting that it will bring back jobs that were previously lost to developing nations.  The intended tradeoffs are clear:  in return for higher costs of manufacturing (and therefore higher costs to the end consumer), we receive more predictable results and buttress portions of the supply chain against global phenomena. 

There is also a national security argument to be made here.  We must ensure that the supply lines and sources for national defense solutions (armaments, aircraft, computing technology, etc) are properly protected against global events.  The recent Russian invasion of Ukraine and China’s (a key provider of many tech supply lines) implicit support of Russian activities help breathe life into this need for supply line defense.  The friend of my enemy is my enemy too, and we cannot rely upon such an enemy to manufacture components critical to our national defense.  But the problem goes beyond the sourcing of such materials – we have a clear and growing problem with the spark that fires the innovation that drives our economy and protects us every day:  scientists and engineers.

Awe-Inspiring Innovation, Built on Unstable Ground

Supply chains and manufacturing capabilities, while necessary, are the last few miles of the conveyer belt that drive our economic prosperity and national defense.  The head-end of that conveyer belt is fed by scientists that help to identify new, and engineers to apply that knowledge to create new products and defense possibilities.  Recall that 66% of our GDP is based on STEM-associated jobs.  But what if I were tell you that roughly 40 percent of the scientists and engineers fueling that GDP activity were foreign born and largely foreign educated engineers and scientists?  And what if I then told you that over 30 percent of those foreign born and educated engineers and scientists hailed from Russia or countries that explicitly or implicitly support Russia?

The US has largely been a net importer of science and engineering talent for quite some time.  We graduate roughly 120K US citizen engineering baccalaureates per year from US institutions , while STEM related H1B (temporary) Visas are on the order of 316K per year.  The good news is that H1B applications are declining, and college STEM participation is increasing – but not at a rate that will address the fact that 40 percent of the engineers in our country aren’t “ours” and potentially 15 percent or more may be closely allied with countries working together to subjugate a sovereign nation.  The following argument should encounter little resistance:  if it’s important for both our defense and our economy to protect manufacturing and supply lines against global events, then it’s equally (and perhaps even more) important to ensure that the innovation that precedes those supply lines is also protected.

Back to the good news, we’ve made significant progress over the course of 70 years.  In the middle to late 40s, the US graduated roughly 48K engineering baccalaureates a year.  Fast forward to present day and we graduate nearly 120K US citizen baccalaureate engineers per year.  The nearly 2.5 fold increase seems promising when compared to a population that has roughly doubled in the same time period.  But dig deeper and we are not yet on the path to engineering and science self-sufficiency:

  • College graduation rates as a percentage of the population has risen from roughly 6% in 1950 to roughly 36% today.
  • While engineers per capita has increased somewhat in that timespan, engineers as a percentage of total college baccalaureates have declined – all in the face of widening demand and increasing participation by non-US citizens.

Put simply, while we have made modest progress in absolute numbers, we are falling behind relative to the demand of our economy and our defense.  We need more engineers in the United States and we need them now.

What Can We Do?

I love the notion of perfect markets, but the university education market clearly isn’t an example of one.  Consider that in most universities, tuition is similar whether you strive for an arts history degree or a computer science degree.  There are modest exceptions like the variation in textbook prices (higher for most technical degrees) and lab fees for engineering and science domains, but these are a relatively small portion of the overall cost of education.  Pay for degrees vary widely however, with most STEM degrees paying significantly more at entry and at mid-career than their alternatives.Why then do STEM degrees represent a minority of all degrees granted in the US?  The answer must be irrational behavior as their exists both information transparency (same cost per education, higher return) and information symmetry (no one is hiding data).

The good news is there are several things we can do in parallel to help ensure our safety and prosperity.  These include:

  • Re-imagining how we teach STEM in secondary schools such that more kids become interested in pursuing STEM (and especially engineering and science) as a career.
  • Re-imagining how we teach STEM in universities to help students see the value of it earlier in their academic careers and help make it more “fun” early where the largest university churn out of engineering is seen.
  • Educating our children on the value of a STEM education.  While college tuition remains roughly constant (outside of lab fees and textbooks) for all degrees, degrees do not have similar returns and STEM degrees tend to significantly out-perform most other degrees.
  • Changing how we allocate capital for college education.  Consider making certain STEM degrees fully funded without debt, with the expectation that such degrees have a higher return on the tax base than the cost of education.  This one is clearly the most controversial, but why issue debt when we can issue equity with a higher rate of return?  Further, it helps to lower the barrier to entry for some participants if they see STEM degrees are “free” compared to having to pay for a lower return degree.  Here market forces can be our friend.
  • Free trade schools that teach engineering related programs at an Associates Degree level.  Examples are computer programming, which is less intensive than computer science and can help offset some of our needs in the engineering space.

In closing, I want to be clear on a few items:

  • This opinion piece was not intended to be nationalistic or argue for an “America First” Strategy.  I’m a globalist and would prefer that the entire world could abide by the theory of comparative advantage.  But I’m also a realist and note that there are bad people (I’ll name one as an example – Putin) who aren’t interested in global prosperity.  Until we resolve these issues, we must ensure that we can continue to prosper with our close allies.
  • AKF does not offer services to help in this space, beyond providing some training for companies in the areas of solutions architecture, agile processes, and CTO/CPO mentoring.  But we do see our clients struggling to hire due to inefficient supply and we see it every day.  It is part of our responsibility to help bring these issues to light and suggest courses of action in which everyone can be involved.

Need help thinking through team organization and construction?  Need assistance setting up sustainable pipelines of engineers for your future growth?  Call us - AKF Partners can help!