Prologue to a Framework for Thinking About “Equitable Growth”…
Let me for one set out how I, at least, see this “equitable growth” business–how I see the conversation we should be having. There are four sequential questions:
- What should we be doing to boost the productive potential of the American economy, and also the world economy? How do we best boost our resources—labor, skills, capital, infrastructure, ideas, and others?
- What should we be doing to ensure that that productive potential was turned into actual useful goods and services produced?
- what should we be doing in order to distribute those useful goods and services to the people who ought to have in some sense—who need them the most, who would enjoy them the most, and who deserve them the most?
Call these: “accumulation”, “production”, and “distribution”. Or, if you want to give them economists’ names: Smith-Solow, North-Keynes, Ricardo-Galbraith.
And then there is (4): what are the interactions and linkages? How does (1) constrain (2) and (3)? How does (2) constrain (3)? How does what we choose to do in (3) feedback onto (1) and (2)? And how does what we choose to do in (2) feedback onto (1)? That these linkages and interactions are key is obvious: you cannot produce where the productive potential is not there; you cannot distribute what is not produced. Moreover, if you are getting the distribution wrong it is very unlikely that you are providing people with the right incentives to make stuff and to build productive potential; it if you are not producing you are giving people no incentive to build productive potential at all.
When you take this as an organizing framework, America’s big economic problems jump out at you.
For accumulation, we need to deal with the facts that America is no longer making the best-in-class investment in education; that our national savings rate is distressingly low; and that we are moving into a world in which our system of property–especially intellectual property–looks less and less likely to provide appropriate signals and rewards for activities that boost our productive capabilities.
For production, we need to deal with the facts that there is an enormous gap between our productive potential and actual output with huge amounts of slack of both labor and capital; that a great deal of our output is actually value-subtracting in the long run–cooking the planet, convincing people to bear financial risks they do not understand, and playing hot-potato with health insurance claims are none of them likely to be activities that add true value, yet these may be a tenth of what our measured output is; and that we should at least think about whether we are on a path that properly allocates burdens to present and future generations.
For distribution, we need to deal with the facts that our income and wealth distributions have taken extraordinary upward leaps in the past generation that greatly diminish the utilitarian welfare generated by a unit of GDP; that our economy is shifting more of its relative effort into sectors and categories–pensions, education, health care, non-rival and non-excludible non-commodities, and other sectors in which externalities are rife—in which we do not expect the market to do well, but have little confidence that government will do better, and hence seek new modes of organization.
The way I put it back in 1993 when I came to Washington for the first time as a grownup to work for Alicia Munnell in Lloyd Bentsen’s Treasury, we then saw America as having six big problems requiring immediate action:
- Rebalancing the federal budget so that the debt-to-GDP ratio was no longer on an upward, explosive trajectory;
- Beginning to deal with global warming via the slow ramp-up of a carbon tax;
- Beginning the reform of our extraordinarily inefficient and extraordinary expensive national health financing system;
- Updating our pension system to deal with the aging of America, the decline of defined-benefit pensions, and the disappointing performance of defined-contribution options;
- Improving our education system so that more of the people who should be going to college would feel that they could risk doing so; and
- Reversing the erosion of America as a middle-class society with at least some equality of opportunity.
Since then we have added:
(7) Properly reregulating finance so it doesn’t do to us what it did to us in 2008; and
(8) Restoring aggregate demand to its proper level.
None of these seemed to us in the Clinton administration to be partisan Democratic issues. Indeed, none of these are partisan Democratic issues.
So why have we made so little progress in the past two decades? The long-run fiscal situation remains discouraging, if not as dire as we two decades ago feared it would be right now–and we Clintonites remember that George W. Bush and his cronies took our hard work at (1) and casually and gleefully smashed most of it with a baseball bat. But health-care financing remains a mess, even if some of us have hope that ObamaCare will do for the country what RomneyCare did for Massachusetts and start us going forward at last. But global warming? Middle-class society with equality of opportunity? A system in which more of those who should get more education do so? Pensions? We are nowheresville relative to twenty years ago.
Insights and ideas are desperately needed.