Progressives need a bolder plan for overcoming structural impediments to more robust growth
It’s time for progressives to move on from a consumption based model and refocus their energies on building a more productive version of democratic capitalism, leading in innovation, generating good jobs in abundance and raising returns to both labour and capital.
Setting out a new progressive growth narrative must begin with an accurate diagnosis of the core economic dilemma facing many post-crisis western economies. In the US, many liberals believe it is weak economic demand, and they prescribe more government spending to stimulate consumption. This is the standard Keynesian remedy, but it is inadequate at best because it does not deal with the US economy’s structural weaknesses: lagging investment and innovation, a paucity of workers with technical and middle-level skills, and unsustainable budget and trade deficits. None of these problems can be fixed by boosting consumption.
We should not be misled by analogies between the present predicament and the Great Depression. In the 1930s, the issue was overproduction and under-consumption; now it is the reverse. Over the past decade especially, Americans have consumed far more than they have produced, borrowing heavily to make up the difference. This model of debt-fuelled consumption brought the country anaemic growth, a shrinking job base, recurrent financial bubbles and crippling debts.
Progressives must disenthrall themselves from the notion that consumption drives US prosperity. There are few economic factoids more misleading than the claim that consumer spending accounts for 70 per cent of US economic activity. Of course, consumer spending creates economic activity, but the question is, where? If you buy a shirt or television, you stimulate manufacturing jobs in China, or perhaps Mexico.
This is not to begrudge these countries opportunities to grow. But the problem with borrowing massively to buy imports is that it does not encourage productive domestic investment. Business investment in the US is a stunning 25 per cent below its long-term trend. America’s job drought is in fact an investment drought. Furthermore, research from the Kauffman Foundation suggests a loss of entrepreneurial verve. The number of business start-ups, which Kauffman says generate most of US net job growth, has plummeted by about a quarter since 2006.
If there is a bright spot in the US economy, it is the rebound of corporate profits and stock prices since 2009. Yet these gains also highlight a stark inequity: returns to capital are up, but returns to labour are down.
Making production rather than consumption the organising principle of US economic policy will not be easy. For a generation, Washington has relentlessly increased subsidies for consumption, assuming that the productive base of the economy will take care of itself.
The consumption bias pervades government and society. It is evident in America’s swollen national debt and long-term fiscal dilemma; in monetary policies that drive the cost of borrowing towards zero; in tax policies that put greater burdens on labour and capital investment than consumption spending; and in trade policies that encourage a deluge of low-cost imports, even at the expense of domestic production and jobs.
We see it at work at the household level as well. Americans today collectively owe over $11 trillion, or about 95 per cent of the country’s disposable income. Leveraged to the hilt, they can no longer rely on cheap credit and low-priced imports to compensate for lost jobs, dwindling production and stagnant middle-class wages. In a world of cheap labour and rapidly narrowing technology gaps, advanced countries can thrive only by speeding the pace of innovation and capturing its economic value in jobs that stay at home.
For all these reasons, progressives need to replace the old growth model with a new strategy that stimulates production rather than consumption, saving rather than borrowing, and exports rather than imports.
Progressives for Production
This shift will require fundamental changes in policy that cut across conventional partisan and ideological lines and challenge entrenched interests. Liberals in the US, for example, are unquestionably right that America needs to boost public investment. But conservatives also are correct in calling for lower taxes on entrepreneurs and urging government regulators to take a light hand to encourage investment in innovative industries.
Political polarisation, in fact, may pose the most daunting obstacle to a high-growth strategy. The two parties are deadlocked in a witless ‘government versus markets’ argument even as it becomes blindingly obvious that both a more dynamic private sector and a more strategic public sector are necessary to create the right conditions for a US economic comeback.
Let’s get specific. What policy changes are required, and what political adjustments do progressives need to make?
Most importantly, US prosperity cannot be rebuilt on the quicksand of chronic government and household borrowing, overconsumption and a soaring national debt.
A high-growth strategy requires a credible framework for long-term debt reduction that boosts public investment now while gradually raising revenues and cutting public spending on consumption. There is no way for America to create more jobs or hone its competitive edge without more investment in modern infrastructure, science and technology, and education and workforce development. Also essential are institutional innovations, such as a national infrastructure bank that would use federal dollars to leverage private capital investments in transport, energy and water projects that can generate measurable economic returns.
How to pay for new investment while also whittling down the nation’s $16 trillion debt? By rebuilding the tax base and slowing the unsustainable growth rates of big entitlements programmes. Health benefits especially are set to balloon as the number of Americans over 65 will double by 2030. But, just as conservatives have adopted a pigheaded stance against tax hikes, too many liberals are in denial about the need to rebalance the nation’s massive social-insurance programmes.
Like some kind of fiscal doomsday machine, automatic, formula driven spending on consumption by retirees is relentlessly crowding out space in the federal budget for future-oriented investments in things progressives ought to care about – early education for poor children, child nutrition and health, access to colleges, environmental protection, and more.
The Congressional Budget Office projects that entitlement spending will more than double, from 7.3 to about 16 per cent of GDP, by 2037. Spending on everything else will fall from 11 to 7 per cent. To deal with the coming demographic tidal wave, Washington will need to trim benefits for the wealthy retirees who need them least.
High-tech innovation and a manufacturing revival
In addition to reorienting fiscal policy around saving, investment and growth, progressives need a balanced strategy that fosters both high-tech innovation and a manufacturing revival.
The US leads the world in a crucial new category of economic activity: ‘data-driven growth’. According to Progressive Policy Institute economist Michael Mandel, the digital realm of internet publishing, search and social media has become one of America’s fastest growing sectors, posting an 80 per cent gain in jobs from 2007 to the present. As US telecommunications companies invest heavily in high-speed mobile broadband, sales of mobile devices and data services are growing exponentially. Mandel’s research shows that, since the first smartphone was introduced in 2007, ‘app’ developers have created 750,000 new jobs. Jacques Bughin of McKinsey & Company estimates that companies that make strategic use of ‘big data’ grow twice as fast as those that do not.
Progressives should give high priority to protecting the innovation ecosystem responsible for the dramatic rise of the data-driven economy. Yet they have often sided reflexively with self-styled ‘consumer activists’ who demand more top-down regulation in the name of privacy, competition, low prices, or a general suspicion of big and successful companies such as Apple, AT&T and Google.
Of course, progressives must stand firm against right-wing attempts to roll back vital health and environmental rules. But, if they are serious about growth, they will embrace a more strategic approach to economic regulation, one that stresses the cumulative impact of rule-making on innovation, productivity and competitiveness as well as traditional concerns about market power and consumer prices.
Innovation is also integral to expanding manufacturing jobs, another key element of a progressive growth strategy. There is promising news here. Thanks to a confluence of economic factors, some major companies (such as Apple, General Electric and Otis Elevator) are beginning to bring production back home. Such factors include rising wages in China (about 17 per cent a year); the higher productivity of US workers; automation that reduces labour’s share of company expenses; rising transportation costs; and an influx of cheap natural gas in the US. Companies are also increasingly worried about intellectual property theft and leery of separating their research and production centres.
Most promising of all is the advent of the “Internet of Everything” – the marriage of the physical and virtual economy through sensors, hyper-fast broadband and real-time data crunching. This promises to modernize and raise productivity in manufacturing, as well as other sectors as yet barely touched by the IT revolution: health care, education and public service delivery.
These developments raise workers’ hopes for relief from wage compression and suggest an opportunity not to reverse globalisation but to rebalance it in favour of domestic production. Policies that encourage ‘inshoring’ of production could reverse the hollowing out of America’s middle class by creating millions of good jobs for workers with both high- and middle-level skills.
All this, of course, implies rising consumer prices, since the US will be making more commodities at home and buying fewer cheap imports. But a modicum of inflation is a price worth paying to rebuild a diverse job base that offers opportunities to all workers, not just those with advanced degrees. After all, unless you are retired or on the dole, to be a consumer you first have to be a worker.
No country, even one as wealthy and fundamentally sound as the US, can afford to consume more than it produces indefinitely. It is time for progressives to refocus the nation’s energies on building a more productive version of democratic capitalism that leads the world in innovation, generates good jobs in abundance and raises returns to both labour and capital.
Debt-fuelled consumption is a formula for slow-motion economic decline. To put western economies back on a high-growth path, we need something different: A new political economy of production. It’s time for progressives to tackle the challenge of creating new wealth with the same passion they bring to spreading it around.
Policy Network published an article by Will Marshall, which summarizes his chapter in Policy Network’s recent publication Progressive Politics after the Crash: Governing from the Left (I.B Tauris, 2013).
You can find the original article here.
