Two
big factors prevent these issues from assuming center stage. First, the
public is increasingly skeptical that government can do much to change
things for the better. The sense of resignation and cynicism plays to
the ideology of Republicans—the claim that government doesn’t have a big
part to play in the economy and that we’re all on our own. Conversely,
resignation harms Democrats, whose core ideology is that government
exists to help ordinary people. Republicans have done their best to
prevent Democrats from delivering on the vision of activist government.
Second,
persistent divisions of race as well as a nativist backlash against
immigrants undermine a common politics of uplift for working Americans
generally. The New Deal/Great Society formula of tax, spend, benefit,
and elect has been sundered by stagnation of working-class earnings and
fears that government aid would only go to “them”—the undeserving poor.
That fear explains much of the opposition to the Affordable Care Act. It
sheds light on why victims of the subprime bust were not the objects of
broad public sympathy. Racial division has been the standard Republican
playbook since Nixon’s Southern Strategy, intensified by Ronald Reagan
and redoubled by the Tea Party. The more that working families are
economically stressed, the less help that government delivers, and the
more the tax burden tilts away from the top, the more credibility the
right has.
In
recent years, with Republicans intensifying their strategy of total
blockade, the Obama administration’s economic policies have been reduced
mostly to a politics of gesture. Increases in the minimum wage, modest
educational reforms, orders for the Labor Department to crack down on
overtime abuses, tweaks to the tax structure—such policies will help
around the edges but not transform the structure of an economy that
delivers increasing inequality and insecurity. The Affordable Care Act, a
legislative success that was more than a gesture, was so bungled in its
execution that, on balance, it raised more doubts about the place of
affirmative government and its steward, the Democrats. The 2009 stimulus
was a limited success, but it was too small to alter the deeper
dynamics of the economy.
The obstacles to reclaiming a
fairer society have little to do with immutable characteristics of the
new, global, digital economy. They are mainly political.
How
to break out of this vicious circle? How to make the economic plight of
working families the core concern that it ought to be? How to restore
constructive government to a leading role in that project? The
obstacles to reclaiming a fairer society have little to do with
immutable characteristics of the new, global, digital economy. They are
mainly political.
Learning from the Good War
One
vivid, positive experience in our collective memory suggests how the
economy could be drastically different. World War II, even more than the
New Deal, profoundly altered the economy in ways that generated a more
equal society, with more opportunity and security, than the one we have
today. These structural changes reinforced one another and affirmed
government as friend of the common person.
The
war was, first, a massive macroeconomic stimulus. Unemployment was
still more than 14 percent in 1940. Thanks to more than $100 billion of
war-production orders in the first six months of 1942—more than the
entire gross domestic product of 1939—joblessness vanished. The war also
recapitalized industry that had languished during the Great Depression,
and it gave government a central place in developing science and
technology. The war was not just a huge jobs program but an
unprecedented job-training program. President Franklin Roosevelt also
chose to use war production to increase the power of unions as full
social partners. A company that wanted defense contracts had to
recognize its unions. So the war transformed labor markets.
Second,
the war altered incomes. Steeply progressive income taxes with marginal
rates as high as 94 percent, limits on executive compensation, and
strict controls on the bond market led to a compression of the income
distribution that lasted more than a quarter-century. The need to
finance the war led to emergency measures pegging the rate on government
bonds at a maximum of 2.5 percent. The Federal Reserve simply bought
whatever quantity of bonds the war effort required. This meant that a
major category of financial industry profit—buying, selling, and
speculating in Treasury bonds—was eliminated, at the expense of the rentier class. Economists even have a name for this process: repression of finance. We could use some of that today.
A
side effect of the Good War was enhanced social solidarity, which in
turn reinforced political support for egalitarian policies. On the home
front, people from diverse walks of life joined in scrap drives, served
together as civil defense wardens, and waited in line together for
ration coupons. A famous survey showed that white soldiers who served
together in units with blacks came out less prejudiced than ones who had
not. Much of the enhanced propensity for civic action that social
scientists such as Robert Putnam and Theda Skocpol have found in the
generation born in the 1920s and 1930s was the result of their wartime
experience.
All
of these structural and attitudinal shifts did not abruptly end in 1945
with V-E and V-J day. They had a long half-life and continued to
contour the American economy for at least another generation. To a far
greater degree than is understood, the broadly shared prosperity of the
postwar boom was a child of the war. It’s also important to appreciate
that many of these shifts reflected not fortuitous side effects but
deliberate political choices. Franklin Roosevelt could have made
war-production planning mainly a business responsibility as Woodrow
Wilson had in World War I, but he chose to make it a substantially
public affair. He did not have to use defense contracting to strengthen
the labor movement, but he chose to. Wilson, in World War I, did nothing
to help organized labor.
Thanks
for the history lesson, you might say, but what does all this have to
do with the present-day economy? Thomas Piketty, in one of the year’s
most celebrated economics books, Capital in the Twenty-First
Century, demonstrates that the tendency of wealth to concentrate is an
inherent characteristic of a capitalist economy. But, Piketty adds in
passing, the exception is national emergencies such as wars.
Advertisement
A program of public investment
aimed at resilience as well as a green transition could produce many of
the same distributive benefits as the Good War. It could restore a
sense of our common fate as Americans and reclaim faith in democratic
government.
Today,
we do not have a war, but we do have an existential emergency of
climate change. The risks of disastrous floods, droughts, extreme
weather, and new forms of pestilence are compounded by the dismal
condition of our infrastructure. A program of
public investment aimed at resilience as well as a green transition
could produce many of the same distributive benefits as the Good War. It
could restore a sense of our common fate as Americans and reclaim faith
in democratic government. That, of course, will take far more political leadership than we’ve seen lately.
Illustration By Victor Juhasz
Bad Advice from Economists
Much
of the sense of mass resignation is reinforced by the mainstream of the
economics profession. It was Lawrence Summers, then President Barack
Obama’s chief economic adviser, who called for a smaller rather than
larger economic stimulus in early 2009, urged a bailout rather than a
restructuring of Wall Street, and then promoted the president’s
disastrous turn to austerity economics in 2010.
We
also hear from many leading economists and pundits that today’s
widening extremes reflect irrevocable trends in capitalism and that the
best we can do is strive for a better-educated population. Thomas
Friedman famously wrote in The World Is Flat that when he was a
child, his parents used to tell him to finish his dinner and to think of
the hungry children in China, adding, “I am now telling my own
daughters, ‘Girls, finish your homework—people in China and India are
starving for your jobs.’” Friedman did not explain how his daughters,
even if they received straight A’s for their homework, might compete
with Chinese wages.
Mainstream
economists offer a few basic stories about what accounts for the
failure of the economy to generate broadly shared prosperity. The
leading candidates include technology, increasing rewards to skills not
possessed by ordinary workers; a long-term shift in the share of income
going to capital as opposed to labor; “winner take all” effects that
deliver super-rewards to entrepreneurial and entertainment superstars;
and the inevitable consequences of a globalization that otherwise adds
to the economy’s efficiency. The subtext of all of these overlapping
accounts is that there’s not much we can do other than improve our
schools.
One
of the most persistent claims is that the economy is rewarding skills
more intensively now than in years past. This is espoused by such
prestigious economists as Massachusetts Institute of Technology’s David
Autor, who also call for more education as the remedy. The trouble with
this view is that there is no good evidence that the economy is
demanding skills at a rate above historic trends. Other moderately
liberal economists, such as Harvard’s Lawrence Katz and Claudia Goldin,
in their book The Race between Education and Technology, contend
that we can solve much of the income-distribution problem with enough
education. Lawrence Mishel of the Economic Policy Institute counters
that the timing of recent trends contradicts the education and
technology account. The very period of most intensified growth of the
digital economy, the middle and late 1990s, was one of increasing
equality, because it was also a period of full employment. Macroeconomic
factors turn out to be more important in raising earnings, as they were
during World War II. If jobs exist, people will be trained to take
them.
As
Paul Krugman has pointed out, a true skills shortage describes only a
small fraction of the labor market. There are good reasons to have a
better-educated and -trained citizenry and to turn out more graduates in
math and the sciences. But that remedy by itself will not solve the
problem of inequality or stagnant wages for the vast majority. Some of
our most highly skilled citizens were the Wall Street fraudsters who
crashed the economy. Many highly skilled professionals have difficulty
finding decent employment, and increasing numbers of college students
are performing jobs that only require a high-school diploma.
Summers
gave an influential presentation late last year in which he suggested
that the economy is vulnerable to financial bubbles and excessive
consumer borrowing to sustain demand because it is not structurally
capable of growing fast enough to generate adequate jobs. The
economist’s term for this disease is secular stagnation. That was the
sort of argument made in the late 1930s, until the wartime spending
demonstrated otherwise.
A number of influential economists blame machines. In their recent and well-reviewed book, The
Second Machine Age, MIT economists Erik Brynjolfsson and Andrew McAfee
describe how digital machines are displacing people at an accelerating
rate. But machines have displaced people throughout the history of
industrial capitalism. The practical policy question is how the fruits
of all that new productivity are to be distributed. Like others, these
authors call mainly for more and better education, but they do suggest
some useful redistributive mechanisms such as a national mutual fund,
more investment in infrastructure, government jobs programs, and
vouchers for basic necessities.
A
far more plausible account, told by such economists as David Weil of
Brown University, David Howell of The New School, and legal scholar
Katherine V. Stone of the University of California, Los Angeles, law
school is that the labor-market institutions of the postwar era, which
defended the labor share of the total national income, have been
drastically weakened, with predictable results. A companion trend is the
liberation of financial capital from the salutary shackles of the war
and postwar period, giving super-elites the ability to capture far more
of the social product than they in any sense earn.
It’s
true that the globalization of manufacturing and the use of far-flung
supply chains reaching into low-wage countries widen income inequality
at home. But there is more than one brand of globalization. We could
just as well have a version with decent labor and social standards. One
of the effects of World War II was that America was able to emphasize
domestic production and rebuilding without being charged with the sin of
protectionism.
The current failure to spread
productivity gains has little to do with technology, skills, or even
globalization—and everything to do with our failure to constrain great
private wealth, empower labor, and creatively use democratic government
for national purposes.
Tinkering
with education and training or even a higher minimum wage will not
restore good earnings for the working and middle class. But the wartime
experience demonstrates that a different structure of a capitalist
economy, rooted in public investment and full employment, is possible. The
current failure to spread productivity gains has little to do with
technology, skills, or even globalization—and everything to do with our
failure to constrain great private wealth, empower labor, and creatively
use democratic government for national purposes.
Illustration By Victor Juhasz
Leadership Lessons from the Roosevelts
For
many of us, the history of modern liberalism begins with Franklin
Roosevelt. In fact, it begins with his Republican fifth cousin, Teddy.
As Doris Kearns Goodwin points out in her recent book, The Bully
Pulpit, Theodore Roosevelt was the first president to use activist
government as a vigorous instrument of the collective good and a
counterforce to constrain the power of financial elites.
Several
aspects of TR’s presidency illuminate our current situation.
Significantly, there was no deep economic crisis, and no war. There was,
however, a set of robber barons with unprecedented concentrations of
wealth. With indignation and passion, Teddy rallied his countrymen to
right the imbalance. He did not fully succeed—that was left to his
cousin. But he made a good start.
Interestingly,
too, the reforms of the first President Roosevelt were aimed mainly at
abuses at the top, not conditions at the bottom. His prime targets were
“malefactors of great wealth” in his superb phrase—railroads, banks, the
Standard Oil trust—and other economic concentrations whose
price-gouging harmed the middle class and led to excessive political
power. TR supported a progressive income tax more to break up the malign
influence of wealth than for its revenue potential.
Only
around the edges did the era of Teddy Roosevelt address the working
class. For example, Upton Sinclair’s exposé of the meatpacking industry,
The Jungle, led to the Pure Food and Drug Act of 1906, a cause
that TR enthusiastically championed. But even this crusade, which
Sinclair intended as a battle against wretched working conditions, ended
up gaining middle-class support mostly out of concern for tainted meat.
“I aimed at the public’s heart,” Sinclair later wrote, “and by
accident, I hit it in the stomach.”
TR
was a middle-class reformer. Except for a handful of formative
experiences, such as his visit to a wretched tenement cigar factory that
won him over to the cause of better labor standards, the plight of the
working class did not figure much in his program. He had little use for
trade unions, much less for socialists. Yet Teddy Roosevelt did put the
federal government squarely on the side of the common people against
what today would be called the 1 percent.
The first Roosevelt shared
with the second a jauntiness, a joy in struggle, a delight in naming his
enemies, and a capacity for rallying the people.
In
a sense, this emphasis was not surprising, because the first decade of
the 20th century was not a period of especially high unemployment
(though late in his presidency the panic of 1907 did produce a short and
sharp depression leading to the creation of the Federal Reserve).
Nonetheless, despite the absence of war or broad economic crisis, TR’s
two terms marked the most activist period of government until Franklin’s
presidency. The first Roosevelt shared with the
second a jauntiness, a joy in struggle, a delight in naming his
enemies, and a capacity for rallying the people.
The
partial reforms of TR and later Woodrow Wilson laid the groundwork for
the New Deal. Many of the middle--aged officials of FDR’s administration
had been young activists during the Progressive Era. There was an
agenda of unfinished business, as well as a large cast of competent
reformers, to draw on. They included not only people in the governments
of TR and Wilson but activists of the settlement-house movement, the
labor movement, and other causes outside government. When FDR staged his
signing ceremony for the Social Security Act in 1935, he gave a
prominent part to the aged Jane Addams, feminist, pacifist, labor
activist, and leader of Chicago’s Hull House, which she founded in 1889
when Teddy Roosevelt was a young civil-service commissioner in
Washington, D.C. The half-century marshaling of support for public
purposes gave government the credibility for its greatest achievement in
World War II.
Public Purpose and the Climate Emergency
The
reformism of the Progressive Era and the solidarity of World War II may
seem like ancient history. But it is becoming ever harder to deny the
climate emergency, and its twin, the infrastructure shortfall. A recent
estimate of the American Society of Civil Engineers is that the United
States has a backlog of deferred basic infrastructure spending of $3.6
trillion. The Civil Engineers’ report card doesn’t even include the
urgent need to provide a 21st-century “smart grid” or world-class
Internet service.
America’s
fastest and cheapest Internet system happens to be offered by a
municipally owned utility in Chattanooga, the descendant of public power
courtesy of Franklin Roosevelt’s Tennessee Valley Authority. For $70 a
month, a resident receives service 50 times faster than in most of the
U.S., comparable to that of the world’s fastest system in Hong Kong. The
local public power company used a grant from the 2009 Recovery Act to
build its fiber-optic system. The city uses its ultra high-speed
Internet as an economic-development tool to attract technology
companies.
The
Chattanooga achievement suggests the broader potential of massive
infrastructure investment. It could provide macroeconomic stimulus, good
middle-class jobs, and employment in design and engineering and make
America more productive and friendly to development. The strategy could
also accelerate the transition to a sustainable, resilient economy and
moderate climate change.
Suppose
we had an infrastructure program of $500 billion a year for ten years,
or $5 trillion. That’s just over 3 percent of GDP. It would cover the
deferred maintenance bill for basic infrastructure for such uses as
water and sewer systems, roads, bridges, rail, public buildings, and the
like, as well as state-of-the-art public Internet systems. The
investment could be financed two-thirds with bonds and one-third with
surtaxes on the wealthy. As during and after World War II, the higher
growth rate would retire the debt.
A
social-investment strategy also addresses the downward pressure of
globalization without resorting to protectionism. The wartime economy
required us to set national goals, limit private finance, and use
national investment and production for America’s purposes. The climate
crisis exists on a global scale, and there will need to be treaties to
reduce carbon; but a strategy linking repair of climate damage to a
commitment to full employment, public investment, and good jobs must be
achieved nationally and will produce mainly domestic production and
employment.
The stakes of this struggle go well beyond
the income distribution and the health of the middle class. At issue is
what kind of democracy we have. In recent years, concentrated economic
power has led to concentrated political power.
The
stakes of this struggle go well beyond the income distribution and the
health of the middle class. At issue is what kind of democracy we have.
In recent years, concentrated economic power has led to concentrated
political power.
The
alternative is a broadly based and broadly legitimate government, where
the challenges of climate change become the basis for restoring shared
prosperity and more democratically accountable government. Belatedly,
Americans will surely demand that government protect them from rising
seas, parched farmland, and weird storms. If the government that
provides that protection is a narrow, corporate--dominated elite, then
we will go even further in the direction of an authoritarian state.
A Rendezvous with Politics
The
practical question becomes how on earth to make this vision of a World
War II–scale transition into plausible politics. Reform eras are always a
dance of social movements and inspired presidents. Movements can push
for frame-breaking ideas, but only a president can make them mainstream.
As Doris Kearns Goodwin points out, great presidents are always pushing
out the boundaries of the political agenda. Both Roosevelts surely did
that, with social movements prodding them. “Teddy loved to be in the
middle of a fight,” Goodwin says. “Not every president does. It’s partly
a temperamental thing.”
As
the history of the two Roosevelts suggests, today’s missing ingredient
is leadership. In the fall of 2008, when I was harboring hopes of a
transformational Obama presidency, I happened to be on a panel with Cass
Sunstein, who described his friend and former University of Chicago
colleague as a “visionary minimalist,” by which Sunstein meant that
Obama liked highly ingenious but modest approaches to public problems.
This turned out to describe Obama’s presidency all too well—and it
turned out to be too weak a politics or a set of policies for a crisis
that required more.
In
a country in which voters reject even token increases in the tax on
gasoline, coal remains king, and hydrofracking is widely held to be
energy salvation, it takes political nerve to lead on climate change.
Yet, as weather weirding ceases to be an abstraction, the opportunity
arises for profound shifts in public sentiment.
Historians may well look back at the past decade as a series of false starts.
Historians may well look back at the past decade as a series of false starts.
Under a different president than George W. Bush, the attacks of
September 11 might have produced a resurgent sense of shared destiny and
reliance on democratic government. Instead, they produced an
obsessively secret government and a deeply divided polity. Under a
bolder progressive than Barack Obama, public investment might have been
sold as something more momentous than a “timely, targeted, and
temporary” fiscal stimulus, the slogan of the 2009 Recovery Act. As
consciousness of climate change has increased, there have been several
missed moments, such as Hurricane Katrina and Superstorm Sandy, where
more inspired leadership might have defined the common threat and the
need for public remedy.
For
many young Americans, today’s urgent issues are the twin risks of
global climate change and depressed economic horizons. For some in the
green movement, reduced material consumption is salutary—because it is
necessary to reduce the environmental toll. But after six years of
belt-tightening, more austerity for the young is no rallying cry. A more
stirring prospect is the use of public investment in technology to
allow good living standards at a much lower cost to the planet.
Sooner
or later, the existential threat that we all face will require a vast
mobilization of public resources and a restoration of public purposes. A
rendezvous is waiting to happen between the climate emergency and the
need for good jobs and careers. Perhaps new social movements will make
this dream a mainstream cause. Possibly the next president will.
