What Is America’s Current Moat?

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Includes: APOL, ATGE, STRA, WMT
by: Cornelius Downs

After World War II, the American economy hummed along. The United States was the world leader in most technologies, and the rest of the developed world had to rebuild its infrastructure before they could even begin to compete with the US. Internally, America had a thriving manufacturing sector which provided well-paying jobs for many. Seen this way, during these years (1950-1970), America’s moat was its technological lead, geographic advantages in size and natural resources, and lack of need to re-build after the war.

As time went on, however, other countries began to catch up. Europe rebuilt and integrated American technologies, at least in non-communist nations. Asia became a manufacturing powerhouse. Slowly, America’s manufacturing jobs began drifting overseas. In a sense, America’s moat shrank considerably over the decades. Its labor force became more service-oriented. Aggregate educational attainment stalled in the 1970s, and more households began to have two wage-earners with relatively low earnings power.

America’s main advantage that it’s had all along is its dynamic entrepreneurial, immigrant culture. Apple (NASDAQ:AAPL) is a truly American creation, its earnings power in 2010 is sensational, and there is a sunny outlook ahead. Silicon Valley is the world’s mega-center for electronic technological advancement, as it has been for over 30 years now. Europeans have resisted the entrepreneurial culture for the most part, especially countries like France.

Of course, this story sounds a little “chicken little”. Wasn’t the Japanese economy the boogeyman in the 1980s? That didn’t last. Besides, these stories about nations competing like economics is a zero-sum game are usually full of bad economics. Just read Paul Krugman’s Pop Internationalism for some examples; chapter 5 is called “The Illusion of Conflict in International Trade”.

The deeper point to be made here is about American income inequality. Within the United States, the demand for labor has massively favored the educated and highly-skilled versus the rest of the country for many years now. America’s elite class is extremely wealthy today, and given the country’s leadership in many, if not most, areas of technology and consumer products, this is not likely to change. The problem is its massive service class. While the fantastically cheap prices at Wal-Mart (NYSE:WMT) help, it is doubtful that there are any fundamental globalization-driven catalysts in store to boost the relative earnings power of this class of people.

Education is clearly one solution. America’s elite universities are one of the primary reasons that its elite business class has done so well. If public schools were better for the rest of the country’s population, this would clearly help, but progress on this front is slow, especially with the current political gridlock. In the absence of a brilliant industrial policy from Obama, I think the story is that the real innovation in the coming years may come from online schools and private post-secondary educational companies like the Apollo Group (NASDAQ:APOL) and Strayer Education (NASDAQ:STRA) .

The market for these companies’ services is huge and growing. The effectiveness of their technologies is improving through trial-and-error. Elite universities such as Middlebury, UC Berkeley, and Yale are adding their online offerings in liberal arts, sciences, and languages. Instead of viewing Phoenix University as a threat, elite schools should take the lead. There is no substitute for a UC Berkeley or Yale education (or degree), but these elite schools could add a lot to the human capital quality of the non-elite class of America, if they viewed online venues as an opportunity rather than a threat.

There is a ton of money to be made in this market, but it is questionable if its potential is being reached by the current management of private educational companies or top non-profit universities. That said, investors in DeVry (DV) or Strayer have done ridiculously well during the past 15 years. There is a deep secular trend in demand for supplemental educational services in the US and elsewhere, and savvy companies able to take advantage of current technologies (whether the internet or smart phones) should be able to cash in. These services build some much needed human capital among America’s non-elite class, and can restore some of America’s moat as well.

Disclosure: None

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