The Pitfalls of Economic Nostalgia
The United States faces economic problems as daunting as any seen since the 1930s. GDP growth and job creation remain slow in the early stages of the current recovery, when both should be strong. Moreover, the pressures of globalization, along with technological advances, have reduced the capacity of American businesses to create new jobs even when demand is strong. These changes have boosted productivity, but most people’s wages and incomes remain stalled. And in the most dynamic sectors of our economy, those technological advances increasingly demand skills beyond those of most working Americans. These developments also have produced rapidly widening gaps in incomes and wealth, so that 20 percent of Americans now own 93 percent of the nation’s financial assets. And the one asset that most families can claim, their homes, has lost an average of 30 percent of its value in the last three years.
Yet, Washington continues to respond to these challenges through an economics of nostalgia. The economic agenda of most conservatives today consists mainly of tax cuts for those at the top who earn, save and invest the most, resting on an unflagging faith that markets are self-correcting and invariably produce the best possible outcome.  After all, this approach seemed to work in the 1980s — even if its reprise under George W. Bush led to nearly a decade of historically anemic job creation and stagnating incomes, and culminated in a disastrous financial meltdown and long deep recession of 2007-2009.  The progressive response amounts mainly to a series of stimulative spending and tax measures bolstered by virtually unlimited and free loans for large financial institutions to stimulate their own lending.  And while similar approaches worked in the 1960s and 1990s, the current iteration has produced the weakest recovery in decades.
The progressives are closer to the mark than the conservatives, because when the private sector underperforms as badly as ours has over the last 18 months, it needs stimulus of the sort currently promoted by the President and likely to pass the Senate this week.   But in an economy hampered by serious structural problems, stimulus alone cannot ignite strong and self-sustaining gains in growth, jobs and incomes. To accomplish that, both sides need to put aside their traditional responses and consider new approaches that can directly address the structural problems holding back real prosperity. Ironically, the most significant initiative to do so is the one program that the Administration gets the least credit for – the health care reforms or at last those parts which over time should slow the rate of increase in medical and insurance costs, and thereby help provide a foundation for faster job creation and wage gains.
These nostalgic economic nostrums seem to blind most of Washington to the necessity for a new economic strategy. For example, it should be evident to all but the most ideologically-blinkered free marketers that the housing market has been dysfunctional for nearly a decade. Moreover, the sustained decline in housing values has produced a “negative wealth effect†which continue to dampen consumer demand when the various stimulus measures run out. Conservatives argue for letting those markets work their will, which would amount to another two years of slow demand and declining assets for most Americans. A better strategy begins by acknowledging that declining housing values are a real problem, now driven by high levels of home foreclosures. We can try to fix that with a new loan program to help families facing foreclosure keep their homes. And if that strengthens consumer demand, it should also trigger significant increases in business investment – and together, both should generate real job gains.
The problem of slow job creation isn’t limited to our current circumstances – in the expansion of 2002-2007, American businesses created jobs at less than half the rate, relative to GDP growth, seen in the expansions of the 1980s and 1990s. Much of this problem comes from the intense competitive pressures unleashed by globalization, which limit the ability of businesses to pass along higher costs by raising their prices, and therefore forces them to cut costs when, for example, their energy, health care or pension bills go up. A reasonable response to this problem would be measures to lower the cost to businesses of creating new jobs. For the short term, for example, we can give U.S. multinationals 18 months to bring back their foreign profits at a lower tax rate, but only if they already expand their U.S. workforces by 5 percent to 10 percent. That would produce an estimated 750,000 to 1.3 million additional jobs. For the longer term, we should consider cutting the payroll tax for employers on a permanent basis and using a carbon fee to restore the revenues for Social Security.
Similarly, neither stimulus nor the market alone can affect the growing mismatch between the IT skills required to excel at most well-paying jobs today and the training of most American workers over age 30 or 35 years. For $300 million to $400 million a year – a fraction of the smallest bank bailout of 2008 or 2009 – Washington could provide grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends so any adult could walk in and receive free computer training. It’s also time to join the rest of the advanced world in recognizing that higher education has become as much a public good as elementary and secondary education. Our idea-based economy now requires that government also ensure genuine low-cost access for both undergraduate and graduate training for anyone attending public colleges and universities, tied perhaps to a requirement for a year or two of public service.
This leaves us a major structural problem that at least Washington acknowledges – the prospect of damaging long-term deficits once the economy recovers, tied to fast-rising entitlement spending for retiring boomers. The economics of nostalgia will be of little use here as well, but a view of a more effective strategy will require a separate discussion.