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I myself am the product of targeted "educational investment" system in former USSR, so I saw that kind of system from the inside. I also saw the American system from the inside in my graduate school years here. "Targeted system" was much more intense (up to 10 times the number of "contact hours" for the same technical discipline). It was vocational system par excellence, and as such it was infinitely more efficient than "liberal arts" US model.
On the basis of my observations I would consider the liberal arts system as criminal waste, and this is what I was meant by overinvestment.
The targeted system was notoriously bad in determining the favorites (in which subjects it will be necessary to teach/train people now for the employment 5 yrs down the road). To compensate for that, it had to be out of date and cover extra-wide areas in training. The situation was superficially similar to Japanese MITI playing favorites and choosing certain industries for long term promotion.
As for the "engineer gap" - I saw it up close. This is a structural problem with US education (students are allowed to choose their curriculum, and then they take easier courses). In USSR the notion of "elective course" was a heresy. Every incoming 1st year student was admitted for "education in the specialty of..." (the student filled up this blank at the time of applying for admission). This same line (specialty) was later repeated in the student's diploma. The curriculum for every specialty was standardized from the student's first day in the college, like assembly line. And this is why the course content was always out of date.
But, after all, the targeted system did not aim at producing cutting edge creative types (and was probably very ill suited for that), but rather at mass training of reasonably competent, interchangeable run-of-the-mill lower and middle level specialists. How to train the Einsteins and Michelangelos -and how many of them the country needs and can simultaneously use- remains unanswered. The liberal education system might be better than the targeted one at this task, but if so, it would be only marginally.

I saw the targeted system in action, too - in East Germany, that is. Talking to a lot of colleagues over there I had the impression that very few were actually happy with their job. It was something they had been forced into, because there was a shortage of at the time. It produced a lot of mediocrity and dissatisfaction.

In contrast, we get a lot of arts students that take our engineering programs after they had a few semesters in arts. It usually accounts for much more creativity. Instead of building a bridge, they architecture a fascinating bridge. Instead of writing computer code, they also take into account user friendliness. Many of our East Asian students are brilliant in reproducing reams of information. When it comes to applying knowledge to new fields, using imagination and dreaming up something new - they usually fail miserably.

There is a reason why a Lexus and a Kia look like a Mercedes. Or why most Makita tools are powerful but ergonomically a disaster. You compare them to let's say a Bosch and you see the difference. This has gotten better over the past years and I think introducing arts and design into engineering had a lot to do with it.

The way the military does "targeted subsidizing" works pretty well here in the US. An engineer going through a commissioning program would, for example, get full tuition assistance, while somebody going for a PoliSci degree would get partial assistance. The literature major still gets a degree, but he doesn't get much help in the way of tuition assistance. See my point?

Just like Friedman wrote, we invest in Human Capital in the military. Why? Because for us, an aeronautical engineer (I'm in the Air Force) would give the military the highest return on investment. So, we spend a bit more to get them in. PoliSci majors make great officers too, so we'll pay for them to. The ability to recite Jane Austin from a literature major is of little use, and therefore less return on investment.