A New Approach to Economic Policy
At the national level, especially, the thrust of policy during the past 30 years has been deregulation. Financial markets have been liberalized. The impact on the labor market of public policy (e.g. through the minimum wage) and of unions has been weakened. Measured by per capita national spending levels, social programs—such as welfare, unemployment benefits, and employment and training investments—have eroded. Industries have been deregulated (trucking, airlines, and telecommunications circa 1979; energy industries in the 1990s). Finally, trade policy has liberalized the flow of goods, services, and investments across U.S. borders.
After this three-decade national experiment, the jury—at least if it’s made up of typical, American middle-class families—is surely in. The verdict: deregulation has not worked.
After a three decade national experiment, the jury is in—deregulation hasn’t worked, at least from the perspective of typical American families.
So let’s try something different.
Before we do, we should be clear about one starting point: the news from the past three decades is not all bad. This has been a period of enormous technological and organizational innovation. Productivity growth, after lagging far below the rates of the 1940s to early 1970s, picked up substantially in the mid-1990s. In industry after industry, the highest-performing companies achieve levels of productivity, service, quality, and innovation that far outstrip the levels of typical and low-performing companies.
What we call for now is not the re-imposition of regulations from the 1960s (even if that were possible), or even indiscriminate reregulation. We call instead for the updating of policies, regulations, and institutions to fit today’s economy. Table 4 (PDF) outlines key elements of an economic agenda—a “New Deal for a New Economy”—and points the reader to sources where more detail on each element can be found.
While many economic agendas come across as a laundry list, our plan represents an explicit effort to create in an integrated or “systemic” policy and institutional response to the challenges of the current economy. The combined impact of the specific policies outlined in Table 4 would address four key challenges in the current U.S. economy.
1. Improving productivity growth, innovation, and competitiveness. The U.S. economy faces unprecedented competitive challenges, as indicated, for example, by its gaping trade deficit. Our New Deal for a New Economy would address these competitive challenges by helping to achieve higher rates of productivity growth and innovation. It would do this, in part, through increased investment in skills and in university-industry research and innovation collaboration. It would do this because workforce and economic development policies tied to particular industry clusters, or networks, would accelerate the spread of effective managerial practices that help raise productivity and quality. It would do this finally because some restraints on marketplace competition (e.g., a higher minimum wage, stronger international labor rights and standards) might prompt some businesses (that would otherwise be profitable with low-productivity approaches) to reconsider their business strategy and explore more productive approaches.
2. Expanding opportunity and security. A New Deal tailored to the 21st century would raise wages for low- and middle-wage workers partly through more widespread unionization. These policies would also give more workers the training, education, portable credentials, and career supports necessary to more successfully navigate our more dynamic economic. Such navigation would be accomplished through the strengthening of industry-linked training partnerships, such as now widespread in Pennsylvania, as well as through increased collective bargaining to increase investments in training, education, and career counseling.
3. Ensuring that demand keeps pace with potential output. A New Deal for a New Economy would help ensure that consumer demand, globally and in the United States, keeps pace with the economy’s capacity to produce. Comparable to the 1920s within the United States, the recent geographic extension of markets, this time globally, has increased productivity growth but has not produced stable mechanisms for distributing the benefits of that productivity growth. The resulting wage-productivity gap (evident, for example, in China, Mexico, and the United States) creates the risk of an eventual economic crisis because consumption falls short of demand. (This kind of “underconsumption” crisis took place in the 1930s.) So far, the danger of a global shortfall in demand has been avoided through mechanisms such as an expansion of consumer debt, including home equity loans, and through the huge U.S. trade deficit, which enables U.S. demand to sustain growth in China. But these mechanisms are not sustainable. A New Deal for a New Economy should ensure a more equitable wage and income distribution, at home and overseas, and thus produce a more stable and sustainable expansion of consumer demand. Investment in energy efficiency and new energy industries will also provide a boost to global demand over the next several decades.
4. Increasing environmental sustainability. An updated New Deal would, finally, help achieve environmental sustainability. It would do this partly through substantial increases in energy efficiency and renewable energy, but also through the promotion of high-productivity business strategies, which are much more compatible with high environmental standards than low-productivity business strategies. Our next New Deal would broaden social support for sharp cuts in carbon emissions and other pollutants because workers would have greater confidence in their ability to get another good job should they lose one at a polluting facility. Social support for cuts that produce some job loss (as well as lots of job gain) would also result from the overall improvement in security and opportunity (number 2 above) and through specific investments in socializing the cost of worker (and community) transitions from polluting jobs/industries to green and clean ones.
In the end, despite the evidence that the U.S. economy is not currently delivering for the middle class, we remain optimistic. The only limitation on our ability to achieve more successful U.S. and Pennsylvania economies—economies with widespread opportunity for all—is our capacity for social innovation and negotiation. We have no doubt that a pragmatic mix of market, regulations, and supportive institutions could improve social, economic, and environmental outcomes.
Opportunities for a wholesale updating of policies and institutions to fit current conditions don’t come about very often in the United States—perhaps every 35 to 70 years. The stakes linked with our ability as a nation to rise to this occasion are high. On this ability hinge the future of the U.S. middle class and, possibly, the future of our planet.
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