A healthy future for the Texas economy will require increased investment in education, particularly in early childhood, Federal Reserve Bank of Dallas President Robert Kaplan said.

“We believe for the future prosperity of this state, we’ve got to do more to create an emphasis on a child zero to five (years old),” he explained at a forum hosted by St. Mary’s University at the Pearl Stable Thursday.

“If the child starts kindergarten and cannot read on grade level, studies show they never do catch up, which means they’re going to be less productive members of society, which means economic productivity for all of us is going to be lower.”

In recent years, access to quality preschool has gained increased attention, most notably with President Obama’s $1 billion funding package to support early childhood education across the country. San Antonio’s Pre-K 4 SA, which has consistently exceeded national standards since its creation in 2013, has served as a model for such programs.

Educational investment, Kaplan said, will be key to adapting to technological disruptions, decreasing workforce participation, and globalization, all of which pose to dampen the U.S. economy if not addressed.

He nevertheless believes stabilizing global oil markets and continued migration to Texas bodes well for the state’s near-term economic prospects.

“My concern is more actually about the country and other states, which are not fairing as well as we are,” Kaplan said to approximately 300 business leaders gathered at the Pearl Stable. “But we’re doing really well in this global battle for people, population, and business.”

Optimistic that healthier consumer spending has lowered the risk of recession, Kaplan added that he believes a rate increase by the Federal Reserve is in order.

“We are at a point (where) we ought to, in the near future, remove some amount of accommodation,” he said.

Moderator Thomas Mengler, St. Mary's University President, and Dallas Federal Reserve Bank President Robert Kaplan speaks with business leaders at the Pearl Stable.
St. Mary’s University President Thomas Mengler and Dallas Federal Reserve Bank President Robert Kaplan speak with business leaders at the Pearl Stable. Credit: Kathryn Boyd-Batstone / Rivard Report

While Texas job growth lagged below 1% at the beginning of this year, Kaplan expects that figure to jump to 2% for the second half, and rise further in 2017.

OPEC’s Wednesday decision to put the brakes on a two-year oil glut will only accelerate this trend.

“The positive is, while energy and the energy industry has been a headwind, no doubt, for the Texas economy the past two years, it’s now at least become neutral and may even become a tail wind,” Kaplan explained.

The mining sector, predominantly energy-based in Texas, has dropped from 13% of the state’s GDP in 2014 to 6% this year. Though undoubtedly a painful trend, some of this, Kaplan argued, is due to diversification, as the state’s population has grown from 22.5 million in 2005 to 27.5 million in 2015.

As an apolitical official, Kaplan wouldn’t comment on specific trade agreements like NAFTA or the TPP, which President-elect Donald Trump has promised to substantially rework or even “tear up.” He did, however, argue that, as the largest exporter in the country, Texas benefits significantly from trade.

“(Trade has) increased not only Texas competitiveness, but U.S. competitiveness, and competitiveness in this hemisphere, which we think has net added jobs in the United States, which might otherwise have been lost to other parts of the world, particularly Asia,” he explained.

Speaking to a New York audience on Wednesday, Kaplan also described immigration as playing “an important role in economic growth in the U.S.”

Dallas Federal Reserve Bank President Robert Kaplan speaks about Texas job growth.
Dallas Federal Reserve Bank President Robert Kaplan speaks about Texas job growth. Credit: Kathryn Boyd-Batstone / Rivard Report

With fiscal policy long constrained by political gridlock in Washington, the Fed’s monetary policy has taken a larger-than-normal role in addressing the nation’s economic woes since the Recession. But making the U.S. economy more adaptable to national pressures and increasing global economic interdependency, Kaplan said, requires a more diverse palette of interventions.

While the the nation’s rates of unemployed and discouraged workers has reached pre-Recession levels, labor participation has nonetheless dropped from 66% to 62.8%, and is projected to fall below 61% over the next 10 years, Kaplan explained. This is in part because the workforce is both aging and being supplanted by new technologies.

The trend will not only lower the GDP but also significantly increase the national debt.

“Assuming no additional action is taken, all of these trends on demographics are creating headwinds,” he said.

Bolstering the workforce long-term and making it more adaptable to a rapidly changing economy will depend a great deal on broader educational investment.

“Workers are going to be more likely to have to get retrained, change careers, probably even more so than I was in my career and my generation,” Kaplan told the Rivard Report. “And so what does that mean? It means education attainment levels.”

Kaplan emphasized programs that increase early childhood literacy, vocational training, and retraining for new industries.

“It will push workers to be more adaptable as business models change and evolve and get commoditized and, in some cases, go away,” he told the Rivard Report afterward. “And I, by the way, see this in almost every industry that I see.”

The Federal Reserve Bank of Dallas is one of 12 regional federal reserve banks that formally meet eight times per year to discuss monetary and economic policy.

Daniel Kleifgen

Daniel Kleifgen

Daniel Kleifgen graduated from Cornell University with a bachelor’s degree in English and philosophy. A native of Pittsburgh, Pa., he came to San Antonio in 2013 as a Teach For America corps member.