What Progressives Must Do to End U.S. Malaise

(US Government Work photo)

[Editor's note: This article reprinted with permission from the Progressive Policy Institute]

It’s easy enough to get progressives to agree that austerity is not the answer to the malaise that pervades the transatlantic world. What’s hard is to forge consensus around a new vision for reviving the west’s economic dynamism. One reason is that the policies necessary to put the United States and Europe back on a high-growth path will disrupt old arrangements and social bargains forged and defended by centre-left parties.

Progressives nonetheless need a new growth narrative, and it must begin with an accurate diagnosis of our core economic dilemma. Many US liberals believe it is weak economic demand, and call for more government spending to stimulate consumption. That’s the standard Keynesian remedy, but it’s insufficient at best because it doesn’t deal with the US economy’s structural weaknesses: lagging investment and innovation; eroding mid-level jobs and stagnant wages; a dearth of workers with technical skills; and, unsustainable budget and trade deficits. None of these problems can be fixed by boosting consumption.

What if progressives made expanding production rather than consumption the organising principle of their economic policy? What if they tackled the imperatives of economic investment, innovation and wealth creation with the same passion they normally reserve for fairness and wealth distribution? Stronger economic growth by itself may not be sufficient to reverse the disturbing rise of economic inequality. But it is the necessary precondition for progressive success in getting people back to work, lifting the middle class, allaying class friction and nativism, and restoring the allure of market democracy.

Here, from an American perspective, are some key steps toward a progressive politics of production:

1. Recognise that slow growth is the fundamental problem

Between 2001 and 2012, the US economy turned in its worst economic performance since before World War II. Annual growth rates averaged just 1.6 per cent (and were lackluster even before the recession and financial crisis hit). The situation in Europe, of course, is far worse: growth in the eurozone was negative (0.4 per cent) last year, and unemployment topped 11 per cent. The transatlantic economies simply aren’t growing fast enough to create jobs for all who need work, finance the social benefits they’ve promised, and sustain their high living standards. They’ve resorted instead to heavy borrowing, and so are mired in a dreary politics of debt and fiscal retrenchment.

2. Shift resources from consumption to investment

More than 40 per cent of the US budget goes to three social insurance programmes: Medicare, Medicaid and Social Security. Automatic, formuladriven spending on health and retirement benefits will double by mid-century as the baby boomers surge into retirement. Such “mandatory” outlays have drastically narrowed Congressional discretion and relentlessly squeezed out domestic spending, now just 14 per cent of the budget and falling. That means less money to modernise America’s ageing infrastructure, plug gaps in our education and worker training systems, and nurture science and technology – not to mention protecting the environment, ensuring public safety and helping people escape poverty. In short, the promises made by politicians long retired or dead are constraining the government’s fiscal flexibility and capacity to grapple with today’s challenges. Instead of imagining that they can evade this dilemma solely by taxing the rich, progressives need to take welfare spending off auto-pilot and shift resources from present consumption to investments that will make our people and businesses more productive in the future.

3. Cut health costs by boosting productivity

Although medical inflation has slowed over the past three years, public health spending is still on a collision course with demographics. Yet many Democrats have dug in their heels against reforms that would “bend down” the health cost curve. This confronts progressives with a Hobson’s Choice: either borrow more to cover the yawning gap between contributions and benefits, or raise taxes on working families. Instead, they ought to trim benefits for affluent retirees, and be open to ways to spur competition among providers to offer higher quality and more efficient care. Over the long term, however, the key to restraining overall US health spending – now 17 per cent of the economy – is raising medical productivity. This will require more technological innovation, not less as many budget analysts assume.

4. Embrace pro-growth tax reform

Given that the rich have reaped the lion’s share of US economic gains, it’s no wonder that progressives want them to pay more in taxes. Rather than focus exclusively on fairness, however they ought to view tax policy as an instrument for spurring productive investment and growth. Since new enterprises contribute disproportionately to net job creation, for example, it makes sense to lower taxes on business start-ups. More broadly, progressives should champion reform of America’s perverse corporate tax code. Its high top rate (35 per cent) leads US companies to shift income abroad, depriving the Treasury of revenue and leaving $1.7 billion in earnings stranded abroad that could otherwise be invested at home. And the code is riddled with loopholes and special breaks that steer companies toward activities that are tax-favoured rather than toward those that can make them more productive and competitive.

5. Enable the “data-driven economy”

Data-driven activities – the production, distribution and use of digital information of all kinds – have become the leading edge of economic innovation and growth in the United States. Since the smart phone was introduced in 2007, the nascent “App” sector has created more than 500,000 jobs. Fueled by major private investment in mobile broadband, mobile commerce doubled in 2012 to $25 billion, about 11 per cent of all e-commerce sales. Europe is also getting a big economic boost from digital commerce. Roberto Masiero of Think!, an innovation-oriented thinktank in Milan, estimates that the Internet economy added almost 500 billion euros to eurozone growth in 2010, equivalent to 4.1 percent of Europe’s GDP. Now “big data” processing and the integration of IT into healthcare, education and energy are poised to spark big gains in productivity – if regulators don’t get in the way. In the United States, for example, regulators persist in applying top-down rules governing telephony to the new medium of broadband communication. And while Europe-wide regulation is a positive step forward, many analysts worry that the EU’s forthcoming data protection regulation could hobble homegrown innovation and disadvantage US companies. Progressives on both sides of the Atlantic should work toward harmonising rules that promote more, not less, data-driven trade and that strike a sensible balance between economic innovation and important values like privacy and data security.

6. Don’t give up on manufacturing

While hugely important, the broadband revolution alone won’t deliver the balanced growth and mid-level jobs western societies need to rebuild the middle class. Rather than concede the permanent loss of manufacturing jobs to offshoring, progressives should develop new strategies aimed at “import recapture.” Thanks to a confluence of factors – rising wages in China, the shale gas boom and recognition that advanced manufacturing requires that design and engineering not be separated from production – major US companies are beginning to “onshore” production. Germany and the Nordic countries have shown that high-wage economies can remain competitive in manufacturing by emphasising premium quality, advanced techniques and intensive workforce training regimes. While we shouldn’t expect dramatic leaps in manufacturing employment, even modest increases will have knockoff effects on employment in related activities. Progressives can’t reverse the impact of globalisation, but we can rebalance it in favour of domestic production.

7. Lower state-imposed obstacles to growth

US conservatives never fail to affix the epithet “job killing” before the word “regulation.” This is empirically false and ignores the essential role that regulation plays in making markets work and keeping powerful actors honest. Still, it’s a mistake for progressives to defend regulations as reflexively as conservatives attack them. Between these extremes there is ample room for common-sense efforts to improve the regulatory climate for growth. PPI’s work, for example, has shown that the accumulated weight of old rules imposes large compliance and opportunity costs on firms, especially small and medium-sized enterprises. The problem isn’t that governments keep writing new rules, but that they have no mechanism for rescinding old ones. What’s needed are institutional innovations – like PPI’s idea for a “Regulatory Improvement Commission” that would periodically prune or modify old rules. By championing regulatory improvement, progressives would underscore their commitment to growth as well as their resolve to reform, not just expand, the public sector. Omitted from this list are other crucial elements of a progressive highgrowth strategy, including better education and training systems, skills-based immigration reform, tougher trade enforcement and energy innovation. But it illustrates the magnitude of the policy changes required to get America and Europe out of their slow-growth rut. Rapid innovation and growth are disruptive, and these changes will blur old partisan lines and discomfit old political allies. But the payoff – a surge of innovation and production across the transatlantic, and the chance to restore shared prosperity – is surely worth the risk.

 

This is an excerpt from Progressive Governance: The Politics of Growth, Stability and Reform, a collection of memos published by Policy Network. Download the entire publication here.

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