August 2, 2012
U.S. growth in 'prosperity economics'—A Commentary by Jacob Hacker and Nathaniel Loewentheil ’13
The following commentary was posted on Politico.com on August 2, 2012.
U.S. growth in 'prosperity economics'
By Jacob Hacker and Nathaniel Loewentheil ’13
The political fight over America’s ailing economy is dominated by one word: debt. For most Americans, however, the real problems are jobs and growth — we don’t have enough of either. Yet our political system seems incapable of tackling the true crisis.
Republicans, to be sure, have called for big changes — witness Rep. Paul Ryan’s “Path to Prosperity.” But his proposals would take us back to the tax-cutting, deregulatory spree of the past decade, when gains mostly went to the richest (as is true again today) while the economy went down in flames.
President Barack Obama, in response, talks about “winning the future” and has proposed critical steps in the right direction. Yet he is having a hard time getting even Democrats to put aside the debt obsession to focus on jobs and growth. And he has yet to lay out the kind of bold proposals needed to tackle today’s massive jobs shortage and rebuild a strong middle class.
These challenges, however, are not beyond fixing. Recent research — detailed in a report published Tuesday — points the way toward effective solutions. In that report, which is being adopted as a national reform agenda by some of the nation’s biggest civil rights, labor and community organizations, we lay out an evidence-based model for how to create shared growth. We call our model “prosperity economics.”
Prosperity economics shows that growth doesn’t trickle down from the rich, but bubbles up from the dispersed innovation and productive capacity of the entire economy. It also shows that government has a crucial, indeed essential, role in fostering that innovation and capacity. There is no inevitable trade-off between creating a dynamic economy and fostering a society of widely distributed growth. The reforms we need to grow richer are also the reforms we need to encourage greater equality.
The reason there’s no trade-off, however, is surprising: It’s the politics.
More and more research shows the key factors that set rich countries apart from poor — and encourage continuing economic and social development — are “inclusive political institutions,” as the economist Daron Acemoglu and political scientist James Robinson explain in their book, “Why Nations Fail: The Origins of Power, Prosperity, and Poverty.” Where government is responsive to the broad citizenry, countries are far better at doing the things that create long-term growth, like investing in education and infrastructure, and ensuring that economic gains translate into a better quality of life for all citizens.
Acemoglu and Robinson list the United States as one of the most successful of these inclusive democracies, examining American development up through the civil rights revolution of the 1960s. But in recent writings, they suggest we are losing our edge. We increasingly display elements found in less successful societies, including runaway inequality, influence-buying, corporate and financial lobbies that tilt government and the market in their favor, and under-investment in our human capital, infrastructure and basic research and development.
The cross-national statistics are damning: Among our peer countries, the U.S. has the highest inequality and relative poverty, as well as the highest rates of infant mortality and lowest life expectancy, despite having far and away the highest health spending per capita. We now also have among the lowest levels of intergenerational social mobility. Kids in most other rich nations have a greater chance of doing better than their parents.
To be sure, some of these problems are not new. But they are increasingly glaring. More important, we are not even beating other wealthy nations on overall economic growth, including countries with much lower inequality and countries that haven’t slashed tax rates on the wealthy. And contrary to popular belief, our small business sector is smaller and our rates of self-employment lower than in other rich countries. It turns out that helping the rich and creating a fast-growing entrepreneurial economy just aren’t the same thing.
Worse yet, we are at risk of falling into a vicious cycle. Inequality in the market has translated into inequality in our democracy. Using their financial power, economic winners seek to subvert public policy to their own ends — to lower taxes, cut public investments, gain special treatment and block new market entrants. Today’s calls for austerity — for further cuts in education and scientific R&D for example — suggest a dangerous shift toward long-term stagnation and increasing disparities.
How do we break out of this trap? It won’t be easy. But we can begin the long process by advancing sound economic policies linked to sensible political reforms. And that’s the key point: We have to rebuild our democracy as well as our economy.
As a first step, we need to get the economy out of its current hole. Major investments in infrastructure and funds to help states rehire teachers and first responders would not only put people back to work but lay the foundations — literally, in the case of infrastructure — for future growth.
After we get the economy moving, we need to expand our productivity through strategic investments in Pre-K and college education and in scientific R&D, the key foundations for competitiveness and shared prosperity in the coming decades.
We also need to reinforce the basic securities on which Americans depend — like retirement savings, health care, and family and medical leave. Security gives people the confidence to invest in skills and take entrepreneurial risks while at the same time caring for family and planning for major contingencies. By ensuring such protection is available, we reinforce the foundations of a dynamic, competitive market, where innovation and change are an opportunity rather than a threat.
In the process, we will also rebuild faith in government and public institutions, placing them on the side of ordinary workers who have wondered—as banks too big to fail received quick help — if they were too small to save.
Which brings us to the last great area of reform, and precondition for them all: fixing our democracy. The virtuous cycle of shared prosperity runs through a democracy that is responsive to the middle class. Today, economic winners write the economic rules, and both our economy and our democracy suffer. We need to curb the power of narrow economic interests, put in place publicly financed campaigns, guarantee workers have the right — in practice, not just in theory — to organize and bargain collectively, and ensure all Americans are able to exercise their franchise.
Growth, security, democracy — these light the true path to shared prosperity. In contrast, Ryan’s budget prescriptions threaten to greatly worsen the situation. Not only would Ryan’s budget reduce public investments and cut popular programs that provide economic security; it would also pile new tax cuts for the wealthy on top of the Bush tax cuts — cuts that can’t plausibly be funded through the loophole-closing that Ryan claims will do the job.
Alas, elements of this agenda have gained such traction inside the Beltway that even if Obama wins reelection, we may end up with cuts in education and economic security only slightly less draconian than those in GOP blueprints. This would be a huge loss for our society — and a huge lost opportunity to revive faith among middle-class Americans that government can address their strains.
We face a stark choice: an austerity agenda focused on debt, or a growth agenda focused on democracy. With political will, political action and guidance from prosperity economics, we can take the right path — the path to shared prosperity.
Jacob Hacker is the Stanley Resor professor of political science and director of the Institution for Social and Policy Studies at Yale University. He is the co-author, with Paul Pierson, of “Winner-Take-All Politics.” Nathaniel Loewentheil is a founder of the Roosevelt Campus Network and a law student at Yale University.